<PAGE> 1
As filed with the Securities and Exchange Commission on March 2, 1999
File No. 33-2610
File No. 811-4550
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 50 [X]
and
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 52 [X]
THE MAINSTAY FUNDS
------------------
(Exact Name of Registrant as Specified in Charter)
51 Madison Avenue
New York, New York 10010
------------------------------------------
(Address of Principal Executive Offices)
(212) 576-5773
---------------------------------
(Registrant's Telephone Number, including Area Code)
with a copy to:
Sara L. Badler, Esq. Jeffrey L. Steele, Esq.
The MainStay Funds Dechert Price & Rhoads
51 Madison Avenue 1775 Eye Street, N.W.
New York, New York 10010 Washington, DC 20006
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
<TABLE>
<S> <C>
[ ] Immediately upon filing pursuant to [ ] on ( ) pursuant to paragraph
paragraph (b), or (b), or
[ ] 60 days after filing pursuant to [X] on May 1, 1999 pursuant to paragraph
paragraph (a)(1), or (a)(1), or
[ ] 75 days after filing pursuant to [ ] on ( ) pursuant to paragraph
paragraph (a)(2), or (a)(2), of Rule 485.
</TABLE>
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<PAGE> 2
PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION RELATING TO
THE MAINSTAY FUNDS
CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-1A
<TABLE>
<CAPTION>
Item Number in Part A Prospectus Caption
- --------------------- ------------------
<S> <C>
1 Front Cover Page; Back Cover Page
2 Investment Objectives, Strategies
and Risks: An Overview
3 Investment Objectives, Strategies
and Risks: An Overview
4 Investment Objectives, Strategies
and Risks: An Overview
5 See Annual Reports
6 Know With Whom You're Investing
7 Sales Charges and Distribution Fees;
Account Policies: Buying, Selling
and Exchanging Shares; Decide How to
Receive Your Earnings; Understand
the Tax Consequences
8 Sales Charges and Distributions Fees
9 Financial Highlights
</TABLE>
C-2
<PAGE> 3
<TABLE>
<CAPTION>
Item Number in Part B Statement of Additional
- --------------------- -----------------------
Information Caption
-------------------
<S> <C>
10 Cover Page and Table of Contents
11 Organization and Capitalization
12 The MainStay Funds; Additional
Information About Certain Funds;
Investment Practices and
Instruments Common to Multiple
Funds
13 Trustees and Officers
14 Other Information
15 The Manager, the Sub-Advisers and
the Distributor
16 Portfolio Transactions and
Brokerages
17 Organization and Capitalization
18 Net Asset Value; Shareholder
Investment Account; Purchases,
Redemption, Exchange and
Repurchase
19 Tax Status
20 The Manager, the Sub-Advisers and
the Distributor
21 Calculation of Performance;
Quotations; Tax Status
22 Financial Statements
</TABLE>
C-3
<PAGE> 4
The MainStay Funds Prospectus May 1, 1999
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
MainStay offers 22 mutual funds. The following [ ] MainStay Funds are offered
in this Prospectus.
INCOME
Global High Yield Fund..........................................................
Government Fund.................................................................
High Yield Corporate Bond Fund..................................................
International Bond Fund.........................................................
Money Market Fund...............................................................
Strategic Income Fund...........................................................
TAX FREE
California Tax Free Fund........................................................
New York Tax Free Fund..........................................................
Tax Free Bond Fund..............................................................
OTHER
Small Cap Growth Fund...........................................................
Small Cap Value Fund............................................................
Blue Chip Growth Fund...........................................................
Capital Appreciation Fund.......................................................
Equity Index Fund...............................................................
International Equity Fund.......................................................
Convertible Fund................................................................
Equity Income Fund..............................................................
Growth Opportunities Fund.......................................................
Research Value Fund.............................................................
Strategic Value Fund............................................................
Total Return Fund...............................................................
Value Fund......................................................................
<PAGE> 5
What's Inside?
Investment Objectives, Strategies and Risks: An Overview........................
More About Investment Strategies and Risks......................................
Sales Charges and Distribution Fees.............................................
Account Policies: Buying, Selling and Exchanging Shares.........................
Decide How to Receive Your Earnings.............................................
Understand the Tax Consequences.................................................
Know With Whom You're Investing.................................................
Financial Highlights............................................................
Appendix A: Taxable Equivalent Yield Table......................................
2
<PAGE> 6
Investment Objectives, Strategies and Risks: An Overview
INCOME FUNDS
This prospectus discusses nine mutual funds (the "Funds") which seek to realize
income for investors. Each of the Funds is managed by MainStay Management Inc.
and has a Sub-Adviser that is responsible for the day to day portfolio
management of the Fund. Some of the Funds seek tax free income. Some of them
also seek, secondarily, capital appreciation, but the principal investment focus
of these Funds is to provide their shareholders with income. Each Fund pursues
somewhat different strategies to achieve its objective, but they all invest,
under normal market conditions, primarily in debt or fixed income securities.
Both governments and companies may raise needed cash by issuing or selling debt
securities to investors. The Funds may buy debt securities directly from those
governments and companies or in the secondary trading markets. There are many
different types of debt securities, including bonds, notes, debentures and
others. Some pay fixed rates of return; others pay variable rates. Interest may
be paid at different intervals. Some debt securities do not make regular
interest payments, but instead are initially sold at a discount to the principal
amount to be paid at maturity. The amount of interest paid is subject to many
variables, including creditworthiness of the issuer, length of maturity of the
security, market factors, and the nature of the debt instrument. Each of the
Funds described in this prospectus invests in particular types of debt
securities, consistent with its own investment objective and strategies which
are described in the succeeding pages of this prospectus.
EQUITY AND FIXED INCOME FUNDS
This prospectus discusses 13 mutual funds (the "Funds") which invest for varying
combinations of income and capital appreciation. Each of the Funds is managed by
MainStay Management Inc. and has a Sub-Adviser that is responsible for the day
to day operations of the Fund. Each of the Funds pursues somewhat different
strategies to achieve its objective, but all of the Equity Funds invest, under
normal market conditions, primarily in equity securities and all of the Fixed
Income Funds invest, under normal market conditions, primarily in debt or fixed
income securities. In times of unusual or adverse conditions, for temporary
defensive purposes, each Fund may invest outside the scope of its principal
investment focus.
Both governments and companies may raise needed cash by issuing or selling debt
securities to investors. The Funds may buy debt securities directly from those
governments and companies or in the secondary trading markets. There are many
different types of debt securities, including bonds, notes, debentures and
others. Some pay fixed rates of return; others pay variable rates. Interest may
be paid at different intervals. Some debt securities do not make regular
interest payments, but instead are initially sold at a discount to the principal
amount to be paid at maturity. The amount of interest paid is subject to many
variables, including creditworthiness of the issuer, length of maturity of the
security, market factors, and the nature of the debt instrument. Each of the
Funds described in this prospectus invests in particular types of debt
securities, consistent with its own investment objective and strategies which
are described in the succeeding pages of this prospectus.
[Publicly held corporations may raise needed cash by issuing or selling equity
securities to investors. When you buy stock in a corporation you become part
owner. The Funds may buy equity securities through principal stock exchanges,
such as the New York Stock Exchange or the American Stock Exchange, or in the
over-the-counter market. There are many different types of equity securities,
including stocks, convertible securities, American Depositary Receipts and
others. Investors buy equity securities to make money through dividend payments
and/or selling them for more than they paid.]
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
which can adversely affect the value of the Fund's holdings.
NOT INSURED
An investment in the Funds is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although the Money Market Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Fund.
YOU COULD LOSE MONEY
Before considering one or more investments, you should understand that you could
lose money.
NAV WILL FLUCTUATE
Securities values change. In the case of debt securities, this usually happens
when interest rates change. Generally when interest rates go up, the value of a
debt security goes down and when interest rates go down, the value of a debt
security goes up. The value of Fund shares, also known as the net asset value
(NAV), will in turn fluctuate based on the value of the Fund's holdings. Other
factors, such as changes in company or industry conditions, changes in how the
market views the creditworthiness of an issuer, changes in economic or market
conditions, changes in relative values of currencies and changes in the average
maturity of a Fund's investment can also affect security values and Fund share
prices. [Investment
3
<PAGE> 7
in common stocks is subject to the risk of changing economic, stock market,
industry and company conditions and the risks inherent in management's ability
to anticipate such changes.]
TEMPORARY INVESTMENTS
In times of unusual or adverse conditions, for temporary defensive purposes,
each Fund may invest outside the scope of its principal investment focus. Under
such conditions, each Fund may invest without limit in money market and other
investments and as described in the next section of the Prospectus.
NON-DIVERSIFIED
The International Bond, Global High Yield, California Tax Free and New York Tax
Free [ ] Funds are "non-diversified" which means that each of these
Funds may invest a greater percentage of its assets than other funds in a
particular issuer. This may make them more susceptible to risks associated with
a single economic, political or regulatory occurrence than diversified Funds.
PORTFOLIO TURNOVER
Portfolio turnover measures the amount of trading a Fund does during the year.
The turnover for each Fund is found in its Financial Highlights. The use of
certain investment strategies may generate increased portfolio turnover. Funds
with high turnover rates (over 100%) often have higher transaction costs (which
are paid by the fund) and may generate short-term capital gains (on which you'll
pay taxes, even if you don't sell any shares by year-end).
MORE INFORMATION
The next section of this prospectus gives you more detailed information about
the investment objectives, policies, strategies, risks, performance and expenses
of each of the nine Funds offered in this prospectus. Please review it
carefully.
4
<PAGE> 8
GLOBAL HIGH YIELD FUND
INVESTMENT OBJECTIVE -- The Global High Yield Fund's investment objective is to
seek to provide maximum current income by investing primarily in high yield debt
securities of non-U.S. issuers. Capital appreciation is a secondary objective.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of its
total assets in debt securities issued by governments and their agencies and
authorities which are located in at least 3 different countries. The Fund
focuses on debt securities that generally are rated in the lower rating
categories of Moody's (Ba to B) and S&P (BB to B), or if unrated are deemed to
be comparable by MacKay-Shields Financial Corporation, the Fund's Sub-Adviser.
The Fund principally invests in countries with emerging markets, and may invest
in countries with established economies, that the Sub-Adviser believes present
favorable opportunities. The Fund's principal investments include Yankee
(dollar-denominated) debt securities, Brady Bonds, and derivative instruments
such as floaters, including inverse floaters, futures, options and swaps.
The Fund may buy and sell currency on a spot basis and enter into forward
foreign currency contracts. The Fund may also buy foreign currency options.
These techniques may be used for any legally permissable purpose, including to
increase the Fund's return.
INVESTMENT PROCESS -- The Sub-Adviser identifies investment opportunities by
beginning with country selection, then assessing local currencies for upside
potential and downside risk and finally, evaluating specific securities based on
the financial condition and competitiveness of the issuer. The Sub-Adviser
considers factors such as prospects for a country's political stability,
currency exchange, interest rates, inflation, relative economic growth and
governmental policies.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
Since the Fund principally invests in FOREIGN SECURITIES, it will be subject to
risks that differ from risks of investing in securities of U.S. issuers. These
include losses due to fluctuating currency values, less liquid trading markets,
greater price volatility, political and economic instability, less publicly
available information about issuers, changes in U.S. or foreign tax or currency
laws, and changes in monetary policy. The risks are likely to be greater in
emerging market countries than in developed market countries.
The Fund principally invests in HIGH YIELD SECURITIES (sometimes called "junk
bonds") which are generally considered speculative because they present a
greater risk of loss, including default, than higher quality debt securities.
These securities pay a premium--a high interest rate or yield--because of the
increased risk of loss. These securities can be also subject to greater price
volatility.
The Fund may use DERIVATIVES to try to enhance returns or reduce the risk of
loss of (hedge) certain of its holdings. Regardless of the purpose, the Fund may
lose money using derivatives. The derivatives may increase the volatility of the
Fund's net asset value and may involve a small investment of cash relative to
the magnitude of risk assumed.
BRADY BONDS are securities created through the exchange of existing commercial
bank loans to foreign sovereign entities for new obligations in connection with
debt restructurings. They are subject to the risks of foreign securities.
The interest rate on a floating rate debt instrument is a variable rate which is
tied to another interest rate such as a money market index or Treasury bill
rate. The interest rate on an inverse floater resets in the opposite direction
from the market rate of interest to which the inverse floater is indexed.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
5
<PAGE> 9
PAST PERFORMANCE
Performance information is not included because the Fund has less than one year
of operating history.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS
A B C
CLASS
CLASS C
GLOBAL HIGH B
YIELD FUND ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID CLASS REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 4.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees(2) % % %
Distribution and/or Service
(12b-1) Fees(3) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. The Manager has agreed to voluntarily reduce its fee payable with respect to
the Global High Yield Fund to an annual percentage of .50% of average daily
net assets.
3. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
6
<PAGE> 10
GOVERNMENT FUND
INVESTMENT OBJECTIVE -- The Government Fund's investment objective is to seek a
high level of current income, consistent with safety of principal.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of its
net assets in U.S. government securities. It may invest up to 35% of its total
assets in mortgage-backed and asset-backed or other securities that are not U.S.
government securities.
INVESTMENT PROCESS -- In pursuing the Fund's investment strategies,
MacKay-Shields Financial Corporation, the Fund's Sub-Adviser, uses a combined
approach to investing, analyzing economic trends as well as factors pertinent to
particular issuers and securities.
The Fund's principal investments are debt securities issued or guaranteed by the
U.S. government and its agencies and instrumentalities. These securities include
U.S. Treasury bills (maturing in one year or less), notes (1-10 years) and bonds
(generally 10 years) as well as Government National Mortgage Association
mortgage-backed certificates and other U.S. government securities representing
ownership interests in mortgage pools such as securities issued by the Federal
National Mortgage Association and by the Federal Home Loan Mortgage Corporation.
Principal investments also include securities with floating and inverse floating
interest rates as well as money market instruments and cash equivalents. The
interest rate on a floating rate debt instrument is a variable rate which is
tied to another interest rate such as a money market index or Treasury bill
rate. The interest rate on an inverse floater resets in the opposite direction
from the market rate of interest to which the inverse floater is indexed. As
part of the Fund's principal strategies, the Sub-Adviser may use a variety of
investment practices such as mortgage-dollar roll transactions, forward
commitments, transactions on a when-issued basis and portfolio securities
lending.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities. You could lose money by investing in the Fund. Investments in the
Fund are NOT GUARANTEED, even though some of the Fund's investments are
guaranteed by the U.S. government or its agencies or instrumentalities.
Principal investments also include DERIVATIVES such as securities with floating
and inverse floating interest rates and mortgaged-backed and asset-backed
securities. The Fund may use derivatives to try to enhance returns or reduce the
risk of loss (hedge) of certain of its holdings. Regardless of the purpose, the
Fund may lose money using derivatives. The derivatives may increase the
volatility of the Fund's net asset value and may involve a small investment of
cash relative to the magnitude or risk assumed.
The Fund's use of investment practices such as mortgage dollar rolls, forward
commitments, transactions on a when-issued basis and securities lending also
present certain risks. A mortgage dollar roll is a transaction in which a Fund
sells mortgage-backed securities from its portfolio to a counterparty and at the
same time agrees to buy a similar security from the same party at a later date.
The principal risk of MORTGAGE DOLLAR ROLLS is that the security the Fund
receives at the end of the transaction is worth less than the security the Fund
sold to the same counterparty at the beginning of the transaction. The principal
risk of FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES is that the security will
be worth less when it is issued than the price the Fund agreed to pay when it
made the commitment. The principal risk of SECURITIES LENDING is that the
financial institution that borrows securities from the Fund could go bankrupt
and the Fund might not be able to recover the securities or their value.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
7
<PAGE> 11
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over a ten year period and by showing how the
Fund's average annual returns for one, five and ten years compare to those of a
broad-based securities market index. Performance figures for Class A shares,
first offered on January 3, 1995, include the historical performance of Class B
shares from inception up to December 31, 1994. Performance figures for Class C
shares, first offered on September 1, 1998, include the historical performance
of Class B shares from inception up to August 31, 1998. Performance data for the
classes after these dates vary based on differences in their expense structures.
Sales loads are not reflected in the bar chart. If they were, returns would be
less than those shown. As with all mutual funds, past performance is not
necessarily an indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
GOVERNMENT FUND (CLASS B) QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
Government Fund
Class A
Class B
Class C
Lehman Brothers
Government Bond Index*
</TABLE>
* The Lehman Brothers Government Bond Index includes issues of the U.S.
government and agencies thereof, as well as fixed rate debt-issues that are
rated investment grade by Moody's, S&P, or Fitch, in that order, with at least
one year to maturity.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
GOVERNMENT FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 4.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees(2) % % %
Distribution and/or Service
(12b-1) Fees(3) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. The Manager has voluntarily established a fee breakpoint for the Government
Fund as follows: .55% on assets in excess of $1 billion.
3. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
8
<PAGE> 12
HIGH YIELD CORPORATE BOND FUND
INVESTMENT OBJECTIVE -- The High Yield Corporate Bond Fund's investment
objective is to seek maximum income through investment in a diversified
portfolio of high yield debt securities. Capital appreciation is a secondary
objective.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of its
total assets in all types of domestic and foreign corporate debt securities that
are ordinarily rated in the lower rating categories of Moody's (Baa and below)
and S&P (BBB and below) or that are unrated but that are considered by
MacKay-Shields Financial Corporation, the Fund's Sub-Adviser, to be of
comparable quality.
INVESTMENT PROCESS -- In pursuing the Fund's investment strategy, the
Sub-Adviser seeks to identify investment opportunities based on the financial
condition and competitiveness of individual companies. The Fund's principal
investments include Yankee (dollar-denominated) debt securities, zero coupon
bonds and U.S. government securities. Zero coupon bonds are debt obligations
issued without any requirement for the periodic payment of interest. Zero coupon
bonds are issued at a significant discount from face value. Zero coupon bonds
tend to be more volatile than conventional debt securities. The Fund may invest
up to 25% of its total assets in equity securities.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
The Fund principally invests in HIGH YIELD SECURITIES (sometimes called "junk
bonds") which are generally considered speculative because they present a
greater risk of loss, including default, than higher quality debt securities.
These securities pay a premium--a high interest rate or yield--because of the
increased risk of loss. These securities can be also subject to greater price
volatility.
Since the Fund invests in FOREIGN SECURITIES, it can be subject to various risks
of loss that are different from risks of investing in securities of U.S.
companies. These include losses due to fluctuating currency values, less liquid
trading markets, political and economic instability, less publicly available
company information, changes in U.S. or foreign tax or currency laws, and
changes in monetary policy. These risks are likely to be greater in emerging
market countries than in developed market countries.
TEMPORARY DEFENSIVE INVESTMENTS -- In times of unusual or adverse market,
economic or political conditions, for TEMPORARY DEFENSIVE PURPOSES, the Fund may
invest without limit in cash and cash equivalents. During this time, the Fund
may invest without limit in securities rated A or higher by Moody's or S&P and
may invest more than 35% of its total assets in U.S. government securities.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
9
<PAGE> 13
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over a ten year period and by showing how the
Fund's average annual returns for one, five and ten years compare to those of a
broad-based securities market index. Performance figures for Class A shares,
first offered on January 3, 1995, include the historical performance of Class B
shares from inception up to December 31, 1994. Performance figures for Class C
shares, first offered on September 1, 1998, include the historical performance
of Class B shares from inception up to August 31, 1998. Performance data for the
classes after these dates vary based on differences in their expense structures.
Sales loads are not reflected in the bar chart. If they were, returns would be
less than those shown. As with all mutual funds, past performance is not
necessarily an indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
HIGH YIELD CORPORATE BOND FUND (CLASS QUARTER/YEAR RETURN
B)
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
High Yield Corporate Bond Fund
Class A
Class B
Class C
First Boston High Yield Index*
</TABLE>
* The First Boston High Yield Index is a market-weighted index that includes
publicly traded bonds rated below BBB by S&P and Baa by Moody's.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HIGH YIELD
CLASS CLASS CLASS CLASS CLASS CLASS
CORPORATE BOND FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 4.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees(2) % % %
Distribution and/or Service
(12b-1) Fees(3) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses(2) % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B Shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. The Manager has voluntarily established a fee breakpoint for the High Yield
Corporate Bond Fund as follows: .55% on assets in excess of $500 million. As
a result, for the fiscal year ended December 31, 1998, the management fee
paid was % and total fund operating expenses were % for Class A
shares and % for Class B and C shares.
3. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
10
<PAGE> 14
INTERNATIONAL BOND FUND
INVESTMENT OBJECTIVE -- The International Bond Fund's investment objective is to
seek to provide competitive overall return commensurate with an acceptable level
of risk by investing primarily in a portfolio of non-U.S. (primarily government)
debt securities.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of its
total assets primarily in debt securities of foreign governments, agencies and
supranational organizations, and secondarily in debt securities of corporate
issuers, located in a variety of countries with a minimum of five countries
other than the U.S. This includes countries with established economies as well
as emerging market countries that MacKay-Shields Financial Corporation, the
Fund's Sub-Adviser, believes present favorable opportunities.
INVESTMENT PROCESS -- In pursuing the Fund's investment strategy, the Fund's
Sub-Adviser seeks to identify investment opportunities by beginning with country
selection, then assessing local currencies for upside potential and downside
risk and finally, evaluating individual securities based on the financial
condition and competitiveness of individual companies. In making investments in
foreign markets, the Sub-Adviser considers several factors including prospects
for currency exchange, interest rates, inflation, relative economic growth and
governmental policies.
The Fund's principal investments include debt securities (limited to 25% of net
assets) rated below BBB by S&P or Baa by Moody's or, if unrated, determined by
the Sub-Adviser to be of comparable quality and mortgage-backed and asset-backed
securities. The Fund's principal investments may have fixed, variable, floating
or inverse floating rates of interest. The interest rate on a floating rate debt
instrument is a variable rate which is tied to another interest rate such as a
money market index or Treasury bill rate. The interest rate on an inverse
floater resets in the opposite direction from the market rate of interest to
which the inverse floater is indexed.
As part of its investment strategy, the Fund may buy and sell currency on a spot
basis and enter into foreign currency forward contracts for hedging purposes or
to increase the Fund's investment return. Additionally, the Fund may buy foreign
currency options, securities and securities index options, and enter into swaps
and futures contracts and related options. These techniques may be used for any
legally permissible purpose, including to increase the Fund's return.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
Since the Fund principally invests in FOREIGN SECURITIES, it will be subject to
various risks of loss that are different from risks of investing in securities
of U.S. based issuers. These include losses due to fluctuating currency values,
less liquid trading markets, greater price volatility, political and economic
instability, less publicly available information about issuers, changes in U.S.
or foreign tax or currency laws, and changes in monetary policy. In addition,
the Fund's investments in emerging market countries present risks in greater
degree than investments in developed market countries.
The Fund's principal investments include HIGH YIELD SECURITIES (sometimes called
"junk bonds") which are generally considered speculative because they present a
greater risk of loss, including default than higher quality debt securities.
These securities can be also subject to greater price volatility.
The Fund's principal investments include DERIVATIVES such as floaters, including
inverse floaters, and foreign currency options, securities and securities index
options, swaps, futures contracts and related options and mortgage-backed and
asset-backed securities. The Fund may use derivatives to try to enhance returns
or reduce the risk of loss (hedge) of certain of its holdings. Regardless of the
purpose, the Fund may lose money using derivatives. The derivatives may increase
the volatility of the Fund's net asset value and may involve a small investment
of cash relative to the magnitude of risk assumed.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
11
<PAGE> 15
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and the life of the
Fund compare to those of a broad-based securities market index. Performance
figures for Class A shares, first offered on January 3, 1995, include the
historical performance of Class B shares from inception up to December 31, 1994.
Performance figures for Class C shares, first offered on September 1, 1998,
include the historical performance of Class B shares from inception up to August
31, 1998. Performance data for the classes after these dates vary based on
differences in their expense structures. Sales loads are not reflected in the
bar chart. If they were, returns would be less than those shown. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
INTERNATIONAL BOND FUND (CLASS B) QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
International Bond Fund
Class A
Class B
Class C
Salomon Brothers
Non-U.S. Dollar World Government
Bond Index*
</TABLE>
* The Salomon Brothers Non-U.S. Dollar World Government Bond Index is an
unmanaged index generally considered to be representative of the world bond
market.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL
CLASS CLASS CLASS CLASS CLASS CLASS
BOND FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 4.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees(2) % % %
Distribution and/or Service
(12b-1) Fees(3) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses(2) % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. The Manager has agreed to waive a portion of its fee payable by the
International Bond Fund until such time as the Fund reaches $50 million in
net assets. As a result, for the fiscal year ended December 31, 1998, the
management fee paid was % and total fund operating expenses were %
for Class A shares and % for Class B and C shares.
3. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
12
<PAGE> 16
MONEY MARKET FUND
INVESTMENT OBJECTIVE -- The Money Market Fund's investment objective is to seek
as high a level of current income as is considered consistent with the
preservation of capital and liquidity.
NOT GUARANTEED -- An investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Although
the Fund seeks to preserve the value of your investment of $1.00 per share, it
is possible to lose money by investing in the Fund. This could occur because of
highly unusual market conditions or a sudden collapse in the creditworthiness of
a company once believed to be an issuer of high-quality, short-term securities.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund invests in short-term
dollar-denominated securities; securities maturing in 397 days (13 months) or
less. The weighted average portfolio maturity will not exceed 90 days. These
securities may include U.S. government securities; bank and bank holding company
obligations such as CDs and bankers' acceptances; commercial paper which is
short-term, unsecured loans to corporations; other corporate loans of one year
or less; and dollar-denominated loans to U.S. and foreign issuers and securities
of foreign branches of U.S. banks such as negotiable CDs, also known as
Eurodollars. The Fund may also invest in variable rate master demand notes,
floating rate notes and mortgage-backed and asset-backed securities. The
interest rate on a floating rate debt instrument is a variable rate which is
tied to another interest rate such as a money market index or Treasury bill
rate. All securities purchased by the Fund must meet the requirements of Rule
2a-7 of the Investment Company Act of 1940 which are designed to mitigate the
risk of loss. There must be a reasonable expectation that at any time until the
final maturity of a floating rate instrument or the period remaining until the
principal amount can be recovered through demand, the market value of the
floating rate instrument will approximate its amortized cost.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
Since the Fund invests in dollar-denominated FOREIGN SECURITIES, it can be
subject to various risks of loss that are different from risks of investing in
securities of U.S. based issuers. These include political and economic
instability, less publicly available issuer information and changes in U.S. or
foreign tax or currency laws.
The Fund's principal investments include DERIVATIVES such as variable rate
master demand notes, floating rate notes and mortgage-backed and asset-backed
securities. If MacKay-Shields Financial Corporation, the Fund's Sub-Adviser, is
wrong about its expectations about changes in interest rates or market
conditions, the use of derivatives could result in a loss.
13
<PAGE> 17
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over a ten year period and by showing how the
Fund's average annual returns for one, five and ten years compare to those of a
broad-based securities market index. Performance figures for Class A shares,
first offered on January 3, 1995, include the historical performance of Class B
shares from inception up to December 31, 1994. Performance figures for Class C
shares, first offered on September 1, 1998, include the historical performance
of Class B shares from inception up to August 31, 1998. Performance data for the
classes after these dates vary based on differences in their expense structures.
Sales loads are not reflected in the bar chart. If they were, returns would be
less than those shown. To obtain current yield information, call 1-800-MAINSTAY.
As with all mutual funds, past performance is not necessarily an indication of
how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
MONEY MARKET FUND (CLASS B) QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
Money Market Fund
Class A
Class B
Class C
To come*
</TABLE>
* To come.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
MONEY MARKET FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) None None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds) None None None
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees(1) % % %
Distribution and/or Service
(12b-1) Fees None None None
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses(1) % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. The management fee for the Money Market Fund is an annual percentage of the
Fund's average daily net assets as follows: .50% up to $300 million; .45%
from $300 to $700 million; .40% from $700 million to $1 billion; and .35% in
excess of $1 billion. The Manager has voluntarily agreed to assume the Fund's
expenses to the extent that such expenses would exceed on an annual basis
.70% of average daily net assets. As a result, for the fiscal year ended
December 31, 1998, the management fee paid was % and total fund operating
expenses were % for Class A shares and % for Class B and C shares.
14
<PAGE> 18
STRATEGIC INCOME FUND
INVESTMENT OBJECTIVE -- The Strategic Income Fund's investment objective is to
provide current income and competitive overall return by investing primarily in
domestic and foreign debt securities.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of its
total assets in a diversified portfolio of domestic and foreign debt or
debt-related securities issued by government and corporate issuers. The
securities may be denominated in U.S. or foreign currencies, and may have fixed,
variable, floating or inverse floating rates of interest. Maturities of the
securities held by the Fund will vary.
The Fund invests in various bond market sectors (U.S. government--including
mortgage-related securities, foreign government, U.S. corporate and foreign
corporate, including high yield securities in each of the sectors).
MacKay-Shields Financial Corporation, the Fund's Sub-Adviser, allocates the
Fund's investments among the various bond market sectors based on current and
projected economic and market conditions.
INVESTMENT PROCESS -- The Sub-Adviser seeks to identify investment opportunities
based on the financial condition and competitiveness of individual companies.
Fundamental economic cycle analysis, credit quality and interest rate trends are
among the principal factors considered in determining whether to increase or
decrease the emphasis placed upon a particular type of security or bond market
sector.
The Fund also invests in a variety of countries, which may include countries
with established economies as well as emerging market countries that the
Sub-Adviser believes present favorable opportunities. Securities of issuers in
one country may be denominated in the currency of another country.
The Fund's principal investments may include securities rated below BBB by S&P
or Baa by Moody's or, if unrated, determined by the Sub-Adviser to be of
comparable quality. The Fund may invest up to 30% of its total assets in equity
securities. The Fund's principal investments include mortgage-backed and
asset-backed securities, mortgage-dollar rolls, when-issued securities and
forward commitments, swap agreements and other derivative instruments including
futures on debt securities and bond index futures, options on these futures and
options on debt securities. The Fund may buy and sell currency on a spot basis
and enter into forward foreign currency contracts for hedging purposes. The Fund
may also buy foreign currency options. A mortgage dollar roll is a transaction
in which a Fund sells mortgage-backed securities from its portfolio to a
counterparty and at the same time agrees to buy a similar security from the same
party at a later date. The Fund may use portfolio securities lending as a
principal investment strategy.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
Since the Fund invests in FOREIGN SECURITIES, it can be subject to various risks
of loss that are different from risks of investing in securities of U.S.
companies. These include losses due to fluctuating currency values, less liquid
trading markets, political and economic instability, less publicly available
company information, changes in U.S. or foreign tax or currency laws, and
changes in monetary policy. The risks are likely to be greater in emerging
market countries than in developed market countries.
The Fund invests in HIGH YIELD SECURITIES (sometimes called "junk bonds") which
are generally considered speculative because they present a greater risk of loss
than higher quality debt securities. These securities pay a premium -- a high
interest rate or yield -- because of the increased risk of loss. These
securities can also be subject to greater price volatility.
The Fund's principal investments include DERIVATIVES such as mortgaged-backed
and asset-backed securities, floaters, including inverse floaters, futures,
options and swaps. The Fund may use derivatives to try to enhance returns or
reduce the risk of loss (hedge) of certain of its holdings. Regardless of the
purpose, the Fund may lose money using derivatives. The derivatives may increase
the volatility of the Fund and may involve a small investment of cash relative
to the magnitude of risk assumed.
The principal risk of MORTGAGE DOLLAR ROLLS is that the security the Fund
receives at the end of the transaction is worth less than the security the Fund
sold to the same counterparty at the beginning of the transaction. The principal
risk of FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES is that the security will
be worth less when it is issued than the price the Fund agreed to pay when it
made the commitment. The principal risk of SWAP AGREEMENTS and SECURITIES
LENDING is that the other party could go bankrupt and the Fund would lose the
value of the security it should have received in the swap or that it lent to the
other party.
The interest rate on a floating rate debt instrument is a variable rate which is
tied to another interest rate such as a money market index or Treasury bill
rate. The interest rate on an inverse floater resets in the opposite direction
from the market rate of interest to which the inverse floater is indexed.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
15
<PAGE> 19
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and the life of the
Fund compare to those of a broad-based securities market index. Performance
figures for Class A shares, first offered on January 3, 1995, include the
historical performance of Class B shares from inception up to December 31, 1994.
Performance figures for Class C shares, first offered on September 1, 1998,
include the historical performance of Class B shares from inception up to August
31, 1998. Performance data for the classes after these dates vary based on
differences in their expense structures. Sales loads are not reflected in the
bar chart. If they were, returns would be less than those shown. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
STRATEGIC INCOME FUND (CLASS B) QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
Strategic Income Fund
Class A
Class B
Class C
Lehman Brothers Aggregate Bond
Index*
</TABLE>
* The Lehman Brothers Aggregate Bond Index includes fixed-rate debt issues rated
investment grade or higher by Moody's, S&P or Fitch, in that order. All issues
must have at least one year left to maturity and have an outstanding par value
of at least $100 million. The Index is comprised of the Lehman Brothers
Government/Corporate, the Mortgage-Backed Securities, and the Asset-Backed
Securities Indices.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STRATEGIC
CLASS CLASS CLASS CLASS CLASS CLASS
INCOME FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 4.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees % % %
Distribution and/or Service
(12b-1) Fees(2) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
16
<PAGE> 20
CALIFORNIA TAX FREE FUND
INVESTMENT OBJECTIVE -- The California Tax Free Fund's investment objective is
to seek to provide a high level of current income exempt from regular federal
income tax and California personal income tax, consistent with preservation of
capital.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 80% of its
total assets in securities which provide tax-exempt income to California
residents, which may include securities issued by the State of California, the
Commonwealth of Puerto Rico, Guam, the Virgin Islands and their political
subdivisions, agencies and authorities. These could have fixed, variable or
floating rates of interest or be zero coupon municipal bonds. The interest rate
on a floating rate debt instrument is a variable rate which is tied to another
interest rate such as a money market index or Treasury bill rate. The two main
types of municipal bonds are "general obligation" and "revenue" bonds. The Fund
also may purchase industrial development and pollution control bonds. The Fund
may not invest more than 20% of its total assets in tax-exempt securities
subject to the federal alternative minimum tax (AMT) for individual
shareholders. Zero coupon bonds are debt obligations issued without any
requirement for the periodic payment of interest. Zero coupon bonds are issued
at a significant discount from face value. Zero coupon bonds tend to be more
volatile than conventional debt securities.
INVESTMENT PROCESS -- MacKay-Shields Financial Corporation, the Fund's
Sub-Adviser, uses a combined approach to investing, analyzing economic trends as
well as factors pertinent to particular issuers and securities.
The long-term tax-exempt securities purchased by the Fund must be rated in one
of the top four categories by Moody's (Baa and above) or S&P (BBB and above), or
if unrated, determined by the Sub-Adviser to be of comparable quality.
Short-term tax-exempt securities must be rated in one of the top three
categories by Moody's (MIG3/VMIG3 and above) or S&P (A-3 and above) and
municipal commercial paper must be rated P-1 by Moody's or A-1 by S&P.
As part of its investment strategy, the Fund also may buy and sell call and put
options, invest in futures contracts on debt securities or securities indexes,
and invest in options on futures contracts.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities. Since the Fund concentrates its investments in California
securities, the NAV of the Fund's shares can be adversely affected by political
developments or economic events in California, including a default of a
municipal issuer or a financial crisis.
The Fund's principal investments include DERIVATIVES such as call and put
options, futures contracts on debt securities or securities indexes and options
and futures contracts. The Fund may use derivatives to try to enhance returns or
reduce the risk of loss (hedge) of certain of its holdings. Regardless of the
purpose, the Fund may lose money using derivatives. The derivatives may increase
the volatility of the Fund's net asset value and may involve a small investment
of cash relative to the magnitude of risk assumed.
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS are generally not secured by
the taxing power of the municipality but are secured by revenues paid by the
industrial user. This means that if the industrial user cannot repay principal
and/or interest on the bonds, the Fund may lose money.
TEMPORARY DEFENSIVE INVESTMENTS -- In times of unusual or adverse market,
economic or political conditions, for TEMPORARY DEFENSIVE PURPOSES the Fund may
invest without limit in cash and cash equivalents. During this time, the Fund
may not invest in accordance with its investment objective or investment
strategies and, as a result, there is no assurance that the Fund will be able to
meet its investment objective. The Fund may also, for defensive purposes, invest
more than 25% of its total assets in industrial development and pollution
control bonds whether or not the users of facilities financed by such bonds are
located in the same geographic region or whether the proceeds are used to
finance similar types of projects. In cases where users are in the same locale,
or where proceeds are used for similar projects, there may be additional risk.
In an economic downturn in the area, or if a business or political development
affects the area or type of project, there could generally be less need for the
facilities. This means that if the industrial user cannot repay principal and/or
interest on the bonds, the Fund may lose money.
In addition, in adverse market conditions such as an uncertain interest rate
environment or when, in the opinion of the Fund's Sub-Adviser, no suitable tax-
exempt securities are available, the Fund may temporarily invest more than 20%
of its total assets in taxable money market instruments, tax-exempt securities
of another state which are not exempt from taxes, or in tax-exempt securities
subject to the AMT. Only those tax-exempt securities of another state which
satisfy the applicable credit and quality standards for California tax-exempt
securities may be purchased by the Fund.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
To help you decide whether taxable or non-taxable yields are better for you, see
Appendix A for a comparative yield table.
17
<PAGE> 21
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and the life of the
Fund compare to those of a broad-based securities market index. Performance
figures for Class B shares, first offered on January 3, 1995, include the
historical performance of Class A shares from inception up to December 31, 1994.
Performance figures for Class C shares, first offered on September 1, 1998,
include the historical performance of Class B shares from inception up to August
31, 1998. Performance data for the classes after these dates vary based on
differences in their expense structures. Sales loads are not reflected in the
bar chart. If they were, returns would be less than those shown. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
CALIFORNIA TAX FREE FUND (CLASS A) QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
California Tax Free Fund
Class A
Class B
Class C
Lehman Brothers Municipal Bond
Index*
</TABLE>
* The Lehman Brothers Municipal Bond Index includes approximately 15,000
municipal bonds rate Baa or better by Moody's with a maturity of at least two
years. Bonds subject to the Alternative Minimum Tax or with floating or zero
coupons are excluded.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower then those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALIFORNIA
CLASS CLASS CLASS CLASS CLASS CLASS
TAX FREE FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- ---
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 4.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees(2) % % %
Distribution and/or Service
(12b-1) Fees(3) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses(2) % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. The Manager has voluntarily agreed to reimburse the expenses of the
California Tax Free Fund to the extent that operating expenses would exceed
on an annual basis 1.24% of average daily net assets for Class A shares and
1.49% of average daily net assets for Class B and C shares. As a result, for
the fiscal year ended December 31, 1998, the management fee paid was %
and total fund operating expenses were % for Class A shares and % for
Class B and Class C shares.
3. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
18
<PAGE> 22
NEW YORK TAX FREE FUND
INVESTMENT OBJECTIVE -- The New York Tax Free Fund's investment objective is to
seek to provide a high level of current income exempt from regular federal
income tax and personal income tax of New York State and its political
subdivisions, including New York City, consistent with preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 80% of its
total assets in securities which provide tax-exempt income to New York
residents, which may include securities issued by the State of New York, the
Commonwealth of Puerto Rico, Guam, the Virgin Islands and their political
subdivisions, agencies and authorities. These could have fixed, variable or
floating rates of interest or be zero coupon municipal bonds. The interest rate
on a floating rate debt instrument is a variable rate which is tied to another
interest rate such as a money market index or Treasury bill rate. The two main
types of municipal bonds are "General Obligation" and "Revenue" bonds. The Fund
also may purchase Industrial Development and Pollution Control Bonds. The Fund
may not invest more than 20% of its total assets in tax-exempt securities
subject to the federal alternative minimum tax (AMT) for individual
shareholders. Zero coupon bonds are debt obligations issued without any
requirement for the periodic payment of interest. Zero coupon bonds are issued
at a significant discount from face value. Zero coupon bonds tend to be more
volatile than conventional debt securities.
INVESTMENT PROCESS -- MacKay-Shields Financial Corporation, the Fund's
Sub-Adviser, uses a combined approach to investing, analyzing economic trends as
well as factors pertinent to particular issuers and securities.
The long-term tax-exempt securities purchased by the Fund must be rated in one
of the top four categories by Moody's (Baa and above) or S&P (BBB and above), or
if unrated, determined by the Sub-Adviser to be of comparable quality.
Short-term tax-exempt securities must be rated in one of the top three
categories by Moody's (MIG3/VMIG3 and above) or S&P (A-3 and above) and
municipal commercial paper must be rated P-1 by Moody's or A-1 by S&P.
As part of its investment strategy the Fund also may buy and sell call and put
options, invest in futures contracts on debt securities or securities indexes,
and invest in options on futures contracts.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities. Since the Fund concentrates its investments in New York securities,
the NAV of the Fund's shares can be adversely affected by political developments
or economic events in New York, including a default of a municipal issuer or a
financial crisis.
The Fund's principal investments include DERIVATIVES such as call and put
options, futures contracts on debt securities or securities indexes and options
and futures contracts. The Fund may use derivatives to try to enhance returns or
reduce the risk of loss (hedge) of certain of its holdings. Regardless of the
purpose, the Fund may lose money using derivatives. The derivatives may increase
the volatility of the Fund's net asset value and may involve a small investment
of cash relative to the magnitude of risk assumed.
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS are generally not secured by
the taxing power of the municipality but are secured by revenues paid by the
industrial user. This means that if the industrial user cannot repay principal
and/or interest on the bonds, the Fund may lose money.
TEMPORARY DEFENSIVE INVESTMENTS -- In times of unusual or adverse market,
economic or political conditions, for TEMPORARY DEFENSIVE PURPOSES the Fund may
invest without limit in cash and cash equivalents. During this time, the Fund
may not invest in accordance with its investment objective or investment
strategies and, as a result, there is no assurance that the Fund will be able to
meet its investment objective. The Fund may also, for defensive purposes, invest
more than 25% of its total assets in Industrial Development and Pollution
Control Bonds whether or not the users of facilities financed by such bonds are
located in the same geographic region or whether the proceeds are used to
finance similar types of projects. In cases where users are in the same locale,
or where proceeds are used for similar projects, there may be additional risk.
In an economic downturn in the area, or if a business or political development
affects the area or type of project, there could generally be less need for the
facilities. This means that if the industrial user cannot repay principal and/or
interest on the bonds, the Fund may lose money.
In addition, in adverse market conditions such as an uncertain interest rate
environment or when, in the opinion of the Fund's Sub-Adviser, no suitable
tax-exempt securities are available, the Fund may temporarily invest more than
20% of its total assets in taxable money market instruments, tax-exempt
securities of another state which are not exempt from taxes, or in tax-exempt
securities subject to the AMT. Only those tax-exempt securities of another state
which satisfy the applicable credit and quality standards for New York
tax-exempt securities may be purchased by the Fund.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
To help you decide whether taxable or non-taxable yields are better for you, see
Appendix A for a comparative yield table.
19
<PAGE> 23
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and the life of the
Fund compare to those of a broad-based securities market index. Performance
figures for Class B shares, first offered on January 3, 1995, include the
historical performance of Class A shares from inception up to December 31, 1994.
Performance figures for Class C shares, first offered on September 1, 1998,
include the historical performance of Class B shares from inception up to August
31, 1998. Performance data for the classes after these dates vary based on
differences in their expense structures. Sales loads are not reflected in the
bar chart. If they were, returns would be less than those shown. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
<CAPTION>
NEW YORK TAX FREE FUND (CLASS A) QUARTER/YEAR RETURN
<S> <C> <C>
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
New York Tax Free Fund
Class A
Class B
Class C
Lehman Brothers Municipal Bond
Index*
</TABLE>
* The Lehman Brothers Municipal Bond Index (which does not have a sales charge)
includes approximately 15,000 municipal bonds rate Baa or better by Moody's
with a maturity of at least two years. Bonds subject to the Alternative
Minimum Tax or with floating or zero coupons are excluded.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS
A B C
CLASS CLASS
NEW YORK B C
TAX FREE FUND ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID CLASS REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 4.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees(2) % % %
Distribution and/or Service
(12b-1) Fees(3) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses(2) % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. The Manager has voluntarily agreed to reimburse the expenses of the New York
Tax Free Fund to the extent that operating expenses would exceed on an annual
basis 1.24% of average daily net assets for Class A shares and 1.49% of
average daily net assets for Class B and C shares. As a result, for the
fiscal year ended December 31, 1998, the management fee paid was % and
total fund operating expenses were % for Class A shares and % for
Class B and Class C shares.
3. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
20
<PAGE> 24
TAX FREE BOND FUND
INVESTMENT OBJECTIVE -- The Tax Free Bond Fund's investment objective is to
provide a high level of current income free from regular federal income tax,
consistent with the preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be subject to state and local
taxes.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests in tax-exempt
securities which are, at the time of purchase, rated in one of the top four
categories (or short-term tax-exempt securities rated in one of the top three
categories) by Moody's or S&P. Not more than 20% of net assets may be invested
in unrated tax-exempt securities which are deemed by MacKay-Shields Financial
Corporation, the Fund's Sub-Adviser, to be of comparable quality. The Fund
normally invests at least 80% of its net assets in "municipal bonds" issued by,
or on behalf of, the states, the District of Columbia, territories,
commonwealths and possessions of the United States and their political
subdivisions, and their agencies, authorities and instrumentalities. The two
main types of municipal bonds are "General Obligation" and "Revenue" bonds. The
Fund may not invest more than 20% of its total assets in tax-exempt securities
subject to the federal alternative minimum tax (AMT) for individual
shareholders.
INVESTMENT PROCESS -- The Sub-Adviser uses a combined approach to investing,
analyzing economic trends as well as factors pertinent to particular issuers and
securities.
Up to 25% of the Fund's total assets may be invested in Industrial Development
bonds. The Fund may invest up to 20% of its net assets in zero coupon bonds, and
up to 20% of its net assets in unrated tax-exempt securities determined by the
Sub-Adviser to be of comparable quality to securities rated within the four
highest grades by S&P and Moody's. Zero coupon bonds are debt obligations issued
without any requirement for the periodic payment of interest. Zero coupon bonds
are issued at a significant discount from face value. Zero coupon bonds tend to
be more volatile than conventional debt securities. Additionally, the Fund may
invest more than 25% of its total assets in municipal bonds that are related in
such a way that an economic, business or political development or change
affecting one such security could also affect the other securities (for example,
securities whose issuers are located in the same state.)
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
The Fund's principal investments include DERIVATIVES such as call and put
options, futures contracts on debt securities or securities indexes and options
and futures contracts. The Fund may use derivatives to try to enhance returns or
reduce the risk of loss (hedge) of certain of its holdings. Regardless of the
purpose, the Fund may lose money using derivatives. The derivatives may increase
the volatility of the Fund's net asset value and may involve a small investment
of cash relative to the magnitude of risk assumed.
Industrial Development and Pollution Control Bonds are generally not secured by
the taxing power of the municipality but are secured by revenues paid by the
industrial user. This means that if the industrial user cannot repay principal
and/or interest on the bonds, the Fund may lose money.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
To help you decide whether taxable or non-taxable yields are better for you, see
Appendix A for a comparative yield table.
21
<PAGE> 25
PAST PERFORMANCE
The bar chart and table indicate some indication of the risks of investing in
the Fund by showing changes in its performance over a ten year period and by
showing how the Fund's average annual returns for one, five and ten years
compare to those of a broad-based securities market index. Performance figures
for Class B shares, first offered on January 3, 1995, include the historical
performance of Class A shares from inception up to December 31, 1994.
Performance figures for Class C shares, first offered on September 1, 1998,
include the historical performance of Class B shares from inception up to August
31, 1998. Performance data for the classes after these dates vary based on
differences in their expense structures. Sales loads are not reflected in the
bar chart. If they were, returns would be less than those shown. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
TAX FREE BOND FUND (CLASS A) QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
Tax Free Bond Fund
Class A
Class B
Class C
Lehman Brothers Municipal Bond
Index*
</TABLE>
* The Lehman Brothers Municipal Bond Index (which does not have a sales charge)
includes approximately 15,000 municipal bonds rate Baa or better by Moody's
with a maturity of at least two years. Bonds subject to the Alternative
Minimum Tax or with floating or zero coupons are excluded.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
TAX FREE BOND FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 4.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fee % % %
Distribution and/or Service
(12b-1) Fees(2) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
22
<PAGE> 26
TOTAL RETURN FUND
INVESTMENT OBJECTIVE -- The Total Return Fund's investment objective is to
realize current income consistent with reasonable opportunity for future growth
of capital and income.
The Fund maintains a flexible approach by investing in a broad range of
securities, which may be diversified by company, by industry and by type.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests a minimum of 30% of
its net assets in equity securities and a minimum of 30% of its net assets in
debt securities. A majority of the Fund's equity securities will normally
consist of stocks of companies with growth in revenues and earnings per share
superior to that of the average of common stocks comprising the S&P 500. The
Fund will also invest in stocks and other equity securities which it believes to
be undervalued.
It is contemplated that the Fund's long-term debt investments will consist
primarily of securities which are rated A or better by S&P or Moody's or, if
unrated, deemed to be of comparable creditworthiness by MacKay-Shields Financial
Corporation, the Fund's Sub-Adviser. Principal debt investments include
mortgage-backed and asset-backed securities and mortgage dollar rolls.
RISKS -- Since the Fund may allocate its assets among equity and debt securities
it has some exposure to the risks of both stocks and bonds. Investment in common
stocks and other equity securities is particularly subject to the risk of
changing economic, stock market, industry and company conditions which can
adversely affect the value of the Fund's holdings. In the case of debt
securities, values change. The values of debt securities fluctuate depending
upon various factors, including interest rates, issuer creditworthiness, market
conditions and maturities.
Principal investments also include DERIVATIVES such as mortgaged-backed and
asset-backed securities. The Fund may use derivatives to try to enhance returns
or reduce the risk of loss (hedge) of certain of its holdings. Regardless of the
purpose, the Fund may lose money using derivatives. The derivatives may increase
the volatility of the Fund's net asset value and may involve a small investment
of cash relative to the magnitude or risk assumed.
A mortgage dollar roll is a transaction in which a Fund sells mortgage-backed
securities from its portfolio to a counterparty and at the same time agrees to
buy a similar security from the same party at a later date.
The principal risk of MORTGAGE DOLLAR ROLLS is that the security the Fund
receives at the end of the transaction is worth less than the security the Fund
sold to the same counterparty at the beginning of the transaction.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
23
<PAGE> 27
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over a ten year period and by showing how the
Fund's average annual returns for one, five and ten years compare to those of a
broad-based securities market index. Performance figures for Class A shares,
first offered on January 3, 1995, include the historical performance of Class B
shares from inception up to December 31, 1994. Performance figures for Class C
shares, first offered on September 1, 1998, include the historical performance
of Class B shares from inception up to August 31, 1998. Performance data for the
classes after these dates vary based on differences in their expense structures.
Sales loads are not reflected in the bar chart. If they were, returns would be
less than those shown. As with all mutual funds, past performance is not
necessarily an indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
TOTAL RETURN FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
Total Return Fund
Class A
Class B
Class C
S&P 500 Index*
</TABLE>
* "S&P 500(R)" and "500" are trademarks of The McGraw-Hill Companies, Inc. The
S&P 500 Index is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
TOTAL RETURN FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 5.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees(2) % % %
Distribution and/or Service
(12b-1) Fees(3) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. The Manager has voluntarily established a fee breakpoint for the Total Return
Fund as follows: .60% on assets in excess of $500 million.
3. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
24
<PAGE> 28
CONVERTIBLE FUND
INVESTMENT OBJECTIVE -- The Convertible Fund's investment objective is to seek
capital appreciation together with current income.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of the
value of its net assets in "convertible securities", that is, bonds, debentures,
corporate notes, preferred stocks or other securities which are convertible into
common stock or the cash value of a stock or a basket or index of equity
securities. The Fund takes a flexible approach by investing in a broad range of
securities of a variety of companies and industries.
The Fund may invest without restriction in securities rated BB or B by S&P or Ba
or B by Moody's.
The balance of the Fund may be invested in non-convertible debt, equity
securities that do not pay regular dividends or U.S. Government securities or
may be held in cash or cash equivalents.
INVESTMENT PROCESS -- In selecting convertible securities for purchase or sale,
MacKay-Shields Financial Corporation, the Fund's Sub-Adviser, takes into account
a variety of investment considerations, including credit risk, projected
interest return and the premium for the convertible security relative to the
underlying common stock.
RISKS -- The net asset value of the Fund will fluctuate and you could lose money
by investing in the Fund. Investment in common stocks and other equity
securities is particularly subject to the risk of changing economic, stock
market, industry and company conditions which can adversely affect the value of
the Fund's holdings. The total return for a convertible security will be partly
dependent upon the performance of the underlying common stock into which it can
be converted.
Principal Investments include high yield securities (sometimes called "junk
bonds") which are generally considered speculative because they present a
greater risk of loss than higher quality debt securities. These securities pay a
premium -- a high interest rate or yield -- because of the increased risk of
loss. These securities can be also subject to greater price volatility.
For the fiscal year ended December 31, 1998, the Fund's portfolio turnover rate
was %.
In light of the limited market for convertible securities and the size of the
Convertible Fund, the Fund's Manager, Sub-Adviser and Board of Trustees believe
that it is in the best interest of the Fund and its shareholders to limit the
Fund's cash inflow in order to better enable the Fund to continue to find
appropriate investment opportunities. Accordingly, Convertible Fund will not
offer or accept purchase orders from new investors. Existing shareholders of
other MainStay Funds are not permitted to make exchanges into the Convertible
Fund. Convertible Fund shareholders of record as of May 30, 1997 may make
additional purchases of shares or redeem shares. The Board of Trustees and
management may elect to open the Fund in the future if they determine it
appropriate to do so.
25
<PAGE> 29
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over a ten year period and by showing how the
Fund's average annual returns for one, five and ten years compare to those of a
broad-based securities market index. Performance figures for Class A shares,
first offered on January 3, 1995, include the historical performance of Class B
shares from inception up to December 31, 1994. Performance figures for Class C
shares, first offered on September 1, 1998, include the historical performance
of Class B shares from inception up to August 31, 1998. Performance data for the
classes after these dates vary based on differences in their expense structures.
Sales loads are not reflected in the bar chart. If they were, returns would be
less than those shown. As with all mutual funds, past performance is not
necessarily an indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
CONVERTIBLE FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
Convertible Fund
Class A
Class B
Class C
First Boston Convertible
Securities Index*
</TABLE>
* The First Boston Convertible Securities Index generally includes 250-300
issues -- convertibles must have a minimum issue size of $50 million; bonds
and preferreds must be rated B- or better by S&P; and preferreds must have a
minimum of 500,000 shares outstanding. Eurobonds are also included if they are
issued by U.S.-domiciled companies, rated B- or higher by S&P, and have an
issue size of greater than $100 million.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
CONVERTIBLE FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 5.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees % % %
Distribution and/or Service
(12b-1) Fees(2) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
26
<PAGE> 30
GROWTH OPPORTUNITIES FUND
INVESTMENT OBJECTIVE -- The Growth Opportunities Fund's investment objective is
to seek long term growth of capital, with income as a secondary consideration.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of
total assets in common stocks and other equity-related securities of
well-established, well-managed companies which appear to have better than
average potential for capital appreciation and have large-to mid-cap market
capitalizations.
INVESTMENT PROCESS -- Madison Square Advisors, Inc., the Fund's Sub-Adviser,
will seek to identify companies which are considered to represent good value
based on historical investment standards, including price/book value ratios and
price/earnings ratios. The Fund is managed with a growth/value orientation which
is determined by market conditions. The Sub-Adviser uses a "top-down" approach
which assesses the macroeconomic environment to determine sector weightings.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate which is generally higher than the
rate expected for non-growth companies. If these expectations are not met, the
market price of the stock may decline significantly, even if earnings show an
absolute increase. Growth company stocks also typically lack the dividend yield
that can cushion stock prices in market downturns. The principal risk of
investing in the value stocks in which the Fund invests is that they may never
reach what the Sub-Adviser believes is their full value or that they may even go
down in value.
For the fiscal year ended December 31, 1998, the Fund's portfolio turnover rate
was %.
27
<PAGE> 31
PAST PERFORMANCE
Performance information is not included because the Fund has less than one year
of operating history.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
GROWTH OPPORTUNITIES CLASS CLASS CLASS CLASS CLASS CLASS
A A
ASSUMING
REDEMPTION
ASSUMING NO AT THE END ASSUMING NO
SHAREHOLDER FEES (FEES PAID DIRECTLY EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION
FROM YOUR INVESTMENT) -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed
on Purchases of Shares (as a
percentage of offering price) 5.50% None None 1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
Maximum Deferred Sales Charge (Load)
(as a percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM
FUND ASSETS)
Management Fees % % %
Distribution and/or Service (12b-1)
Fees(2) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating Expenses % % %
=== === ===
<CAPTION>
GROWTH OPPORTUNITIES CLASS
A
ASSUMING
REDEMPTION
AT THE END
SHAREHOLDER FEES (FEES PAID DIRECTLY OF EACH PERIOD
FROM YOUR INVESTMENT) --------------
<S> <C>
Maximum Sales Charge (Load) Imposed
on Purchases of Shares (as a
percentage of offering price) $
$
$
$
Maximum Deferred Sales Charge (Load)
(as a percentage of redemption
proceeds)(1)
Exchange Fee
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM
FUND ASSETS)
Management Fees
Distribution and/or Service (12b-1)
Fees(2)
Other Expenses
Total Fund Operating Expenses
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
28
<PAGE> 32
CAPITAL APPRECIATION FUND
INVESTMENT OBJECTIVE -- The Capital Appreciation Fund's investment objective is
to seek long-term growth of capital. Dividend income, if any, is an incidental
consideration.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests in securities of
companies with investment characteristics such as:
- - participation in expanding product or service markets;
- - increasing unit sales volume;
- - growth in revenues and earnings per share superior to that of the average of
common stocks comprising indices such as Standard & Poor's 500 Composite Price
Index; or
- - increasing return on investment.
INVESTMENT PROCESS -- The Fund maintains a flexible approach towards investing
in various types of companies as well as types of securities including common
stocks, preferred stocks, warrants and other equity securities, depending upon
the economic environment and the relative attractiveness of the various
securities markets.
As a result the Fund may invest in any other securities which, in the judgment
of MacKay-Shields Financial Corporation, the Fund's Sub-Adviser, are ready for a
rise in price, or expected to undergo an acceleration in growth of earnings
because of special factors such as new management, new products, changes in
consumer demand or changes in the economy.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
Opportunities for greater gain often come with greater risk of loss. Some of the
securities, therefore, may carry above-average risk, compared to common stock
indexes, such as the Dow Jones Industrial Average and the S&P 500 Index.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate which is generally higher than the
rate expected for non-growth companies. If these expectations are not met, the
market price of the stock may decline significantly, even if earnings showed an
absolute increase. Growth company stocks also typically lack the dividend yield
that can cushion stock prices in market downturns.
For the fiscal year ended December 31, 1998, the Fund's portfolio turnover was
%.
29
<PAGE> 33
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over a ten year period and by showing how the
Fund's average annual returns for one, five and ten years compare to those of a
broad-based securities market index. Performance figures for Class A shares,
first offered on January 3, 1995, include the historical performance of Class B
shares from inception up to December 31, 1994. Performance figures for Class C
shares, first offered on September 1, 1998, include the historical performance
of Class B shares from inception up to August 31, 1998. Performance data for the
classes after these dates vary based on differences in their expense structures.
Sales loads are not reflected in the bar chart. If they were, returns would be
less than those shown. As with all mutual funds, past performance is not
necessarily an indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
CAPITAL APPRECIATION FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
Capital Appreciation Fund
Class A
Class B
Class C
S&P 500 Index*
</TABLE>
* "S&P 500(R)" and "500" are trademarks of The McGraw-Hill Companies, Inc. The
S&P 500 Index is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CAPITAL APPRECIATION CLASS CLASS CLASS CLASS CLASS CLASS
FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 5.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees(2) % % %
Distribution and/or Service
(12b-1) Fees(3) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. The Manager has voluntarily established fee breakpoints for the Fund as
follows: .65% on assets in excess of $200 million and .50% on assets in
excess of $500 million.
3. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
30
<PAGE> 34
SMALL CAP GROWTH FUND
INVESTMENT OBJECTIVE -- The Small Cap Growth Fund's investment objective is to
seek long-term capital appreciation by investing primarily in securities of
small-cap companies.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of
total assets in common stocks, preferred stocks, warrants and other equity
securities of companies with market capitalizations generally between $100
million and $1.5 billion. MacKay-Shields Financial Corporation, the Fund's
Sub-Adviser, selects investments according to the economic environment and the
attractiveness of particular markets and the financial condition and
competitiveness of individual companies.
INVESTMENT PROCESS -- The Sub-Adviser looks for securities of companies with the
following characteristics:
- - above average revenue and earnings per share growth;
- - participation in growing markets;
- - potential for positive earnings surprises;
- - strong management with, ideally, high insider ownership.
The Fund also invests in the securities of companies that are deemed by the
Sub-Adviser to be attractive due to special factors like new management, new
products, changes in consumer demand or changes in the economy.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
Stocks of small-capitalization companies may be more volatile in price, have
greater spreads between their bid and ask prices and have significantly lower
trading volumes than companies with larger capitalizations. They may have
cyclical, static or moderate growth prospects. Small-capitalization companies
may be more vulnerable to adverse business or market developments than large-
cap companies.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate which is generally higher than the
rate expected for non-growth companies. If these expectations are not met, the
market price of the stock may decline significantly, even if earnings show an
absolute increase. Growth company stocks also typically lack the dividend yield
that can cushion stock prices in market downturns.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
31
<PAGE> 35
PAST PERFORMANCE
Performance information is not included because the Fund has less than one year
of operating history.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
SMALL CAP GROWTH FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 5.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees % % %
Distribution and/or Service
(12b-1) Fees(2) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
32
<PAGE> 36
SMALL CAP VALUE FUND
INVESTMENT OBJECTIVE -- The Small Cap Value Fund's investment objective is to
seek long-term capital appreciation by investing primarily in securities of
small-cap companies.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of
total assets in common stocks and securities convertible into common stocks of
companies with market capitalizations at the time of purchase within the
capitalization spectrum defined by the Russell 2000 stock index. In addition,
the Fund has adopted a non-fundamental policy whereby it will invest at least
80% of net assets in such securities.
INVESTMENT PROCESS -- Dalton, Greiner, Hartman, Maher & Co., the Fund's
Sub-Adviser, uses a proprietary "value" method in managing the Fund's assets. In
its securities selection process, the Sub-Adviser focuses on securities which it
believes are undervalued and have positive and/or improving fundamentals. The
Sub-Adviser uses a proprietary valuation model and fundamental security
analysis, including direct company contact, to select investments for the Fund.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
Stocks of small-capitalization companies may be more volatile in price, have
greater spreads between their bid and ask prices and have significantly lower
trading volumes than companies with larger capitalizations. They may have
cyclical, static or moderate growth prospects. Small-capitalization companies
may be more vulnerable to adverse business or market developments than large-
cap companies.
The principal risk of investing in the value stocks in which the Fund invests is
that they may never reach what the Sub-Adviser believes is their full value or
that they may even go down in value. In addition, different types of stocks tend
to shift in and out of favor depending on market and economic conditions and
therefore the Fund's performance may be lower or higher than that of funds that
invest in other types of equity securities (such as those emphasizing growth
stocks).
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
33
<PAGE> 37
PAST PERFORMANCE
Performance information is not included because the Fund has less than one year
of operating history.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
SMALL CAP VALUE FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 5.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees % % %
Distribution and/or Service
(12b-1) Fees(2) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
34
<PAGE> 38
BLUE CHIP GROWTH FUND
INVESTMENT OBJECTIVE -- The Blue Chip Growth Fund's investment objective is to
seek capital appreciation by investing primarily in securities of
large-capitalization companies. Current income is a secondary investment
objective.
PRINCIPAL INVESTMENT'S STRATEGIES -- The Fund normally invests at least 80% of
total assets in common stocks and other securities having equity
characteristics, such as convertible debt, convertible preferred securities,
preferred stocks, warrants and rights issued by Blue Chip companies (i.e.,
companies which possess leading market characteristics and certain financial
characteristics) having market capitalizations of greater than $2 billion and
revenues greater than $500 million.
INVESTMENT PROCESS -- The Fund invests in companies judged by Gabelli Asset
Management Company, the Fund's Sub-Adviser, to have superior earnings per share
growth prospects and above-average or expanding market shares, profit margins
and returns on equity.
The Sub-Adviser chooses securities for the Fund using fundamental securities
analysis to develop company earnings forecasts, selecting those securities which
it perceives to be undervalued or to otherwise have growth potential.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings. The
total return for a convertible security will be partly dependent upon the
performance of the underlying common stock into which it can be converted.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
35
<PAGE> 39
PAST PERFORMANCE
Performance information is not included because the Fund has less than one year
of operating history.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
BLUE CHIP GROWTH FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 5.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees % % %
Distribution and/or Service
(12b-1) Fees(2) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
36
<PAGE> 40
EQUITY INCOME FUND
INVESTMENT OBJECTIVE -- The Equity Income Fund's investment objective is to
realize maximum long-term return from a combination of capital appreciation and
income.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund takes a flexible approach,
emphasizing investments in common stocks and other equity income producing
securities. The Fund normally invests at least 65% of total assets in equity
income-producing securities which
- - MacKay-Shields Financial Corporation, the Fund's Sub-Adviser, believes were
undervalued when purchased;
- - pay cash dividends;
- - are listed on a national securities exchange or traded in the over the counter
market.
The Fund also may invest up to 35% of total assets in equity securities that do
not pay regular dividends, debt securities, U.S. government securities, cash or
cash equivalents. The Fund also invests in convertible securities and REITs
(real estate investment trusts).
INVESTMENT PROCESS -- The Sub-adviser will seek to invest primarily in equities
which pay out dividends and are deemed to be undervalued based on a number of
factors. Those may include: relative valuation, prospects for future earnings
growth, ability to grow dividends and corporate management. The Sub-Adviser
seeks to identify investment opportunities based on the financial condition and
competitiveness of individual companies.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings. The
total return for a CONVERTIBLE SECURITY will be partly dependent upon the
performance of the underlying common stock into which it can be converted.
The principal risk of investing in the value stocks in which the Fund invests is
that they may never reach what the Sub-Adviser believes is their full value or
that they may even go down in value. In addition, different types of stocks tend
to shift in and out of favor depending on market and economic conditions and
therefore the Fund's performance may be lower or higher than that of funds that
invest in other types of equity securities (such as those emphasizing growth
stocks).
REITS are pooled investment vehicles that invest primarily in either real estate
or real estate-related loans. The value of a REIT is affected by changes in the
value of the properties owned by the REIT or securing mortgage loans held by the
REIT. REITs are dependent upon cash flow from their investments to repay
financing costs.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
37
<PAGE> 41
PAST PERFORMANCE
Performance information is not included because the Fund has less than one year
of operating history.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
EQUITY INCOME FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 5.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees % % %
Distribution and/or Service
(12b-1) Fees(2) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
38
<PAGE> 42
RESEARCH VALUE FUND
INVESTMENT OBJECTIVE -- The Research Value Fund's investment objective to seek
long-term capital appreciation by investing primarily in securities of
large-capitalization companies.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 80% of
total assets in common stocks and other securities having equity
characteristics, such as convertible debt, convertible preferred securities,
preferred stocks, warrants and rights issued by companies with market
capitalizations of greater than $2 billion.
The Fund's Sub-Adviser, John A. Levin & Co., Inc., generally seeks to select
securities it believes are undervalued in relation to their intrinsic value as
indicated by the earnings and cash flow potential or the asset value of the
respective issuers. The Sub-Adviser also considers growth and new products on a
selective basis.
INVESTMENT PROCESS -- The Sub-Adviser follows a value-oriented investment
philosophy in selecting stocks for the Fund using a research intensive approach
that considers factors such as: security prices that reflect a market valuation
which is judged to be below the estimated present or future value of the
company; favorable earnings growth prospects; expected above average return on
equity and dividend yield; the financial condition of the issuer; and various
qualitative factors. Although payment of current dividends and income are
considered by the Sub-Adviser, they are not primary factors in the selection of
investments.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
The principal risk of investing in the value stocks in which the Fund invests is
that they may never reach what the Sub-Adviser believes is their full value or
that they may even go down in value. In addition, different types of stocks tend
to shift in and out of favor depending on market and economic conditions and
therefore the Fund's performance may be lower or higher than that of funds that
invest in other types of equity securities (such as those emphasizing growth
stocks).
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
39
<PAGE> 43
PAST PERFORMANCE
Performance information is not included because the Fund has less than one year
of operating history.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
RESEARCH VALUE FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 5.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees % % %
Distribution and/or Service
(12b-1) Fees(2) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
40
<PAGE> 44
STRATEGIC VALUE FUND
INVESTMENT OBJECTIVE -- The Strategic Value Fund's investment objective is to
seek maximum long-term total return from a combination of common stocks,
convertible securities and high yield securities.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests in foreign and
domestic securities in three asset classes, limited by the following:
- - 30% to 80% of net assets in common stocks which:
- -- the Sub-Adviser believes are "undervalued" (selling below their value) when
purchased;
- -- typically pay dividends, although there may be non-dividend-paying stocks if
they meet the "undervalued" criteria;
- -- are listed on a national securities exchange or are traded in the
Over-the-Counter (OTC) market.
- - 10% to 40% of net assets in corporate debt securities: all types of debt
securities ordinarily in the lower rating categories of Moody's (Baa to B) and
S&P (BBB to B) or judged to be of comparable creditworthiness by
MacKay-Shields Financial Corporation, the Fund's Sub-Adviser.
- - 10% to 40% of net assets in convertible securities (such as preferred stocks,
bonds, debentures, corporate notes, and others which can be converted into
common stock or the cash value of a single equity security or a basket or
index of equity securities), which may be in any rating category or unrated.
Within these limitations, the Fund may also invest up to 20% of net assets in
securities that are rated CCC or below by Moody's or S&P or judged by the
Sub-Adviser to be of comparable quality. Generally, foreign investments are in
the form of American Depositary Receipts.
At times, the actual allocation for each asset class may differ from the
limitations set forth above, due to market fluctuations or cash entering or
leaving the Fund. This could happen for instance, if the Sub-Adviser has
positioned the assets close to a minimum or maximum for one or more asset
classes, and the Fund's cash position changes because of investors buying or
selling the Fund's shares. To correct the situation, the Sub-Adviser intends to
move cash or reallocate assets within seven days.
INVESTMENT PROCESS -- Generally, the Sub-Adviser seeks out undervalued
securities in all asset classes. Usually, stocks deemed to be at full value will
be replaced with new, "undervalued" stocks. When assessing whether a stock is
undervalued, the Sub-Adviser considers many factors and will compare the market
price to the company's "book" value, estimated value of the company's assets
(liquidating value), and cash flow. To a lesser extent, the Sub-Adviser will
also look at trends and forecasts such as growth rates and future earnings.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
The principal risk of investing in the value stocks in which the Fund invests is
that they may never reach what the Sub-Adviser believes is their full value or
that they may even go down in value. In addition, different types of stocks tend
to shift in and out of favor depending on market and economic conditions and
therefore the Fund's performance may be lower or higher than that of funds that
invest in other types of equity securities (such as those emphasizing growth
stocks).
The total return for a CONVERTIBLE SECURITY will be partly dependent upon the
performance of the underlying common stock into which it can be converted.
In the case of debt securities, values change. This usually happens when
interest rates change. Generally when interest rates go up, the value of a debt
security goes down and when interest rates go down, the value of a debt security
goes up.
The Fund invests in HIGH YIELD SECURITIES (sometimes called "junk bonds") which
are generally considered speculative because they present a greater risk of loss
than higher quality debt securities. These securities pay a premium -- a high
interest rate or yield -- because of the increased risk of loss. These
securities can be also subject to greater price volatility.
Since the Fund invests in FOREIGN SECURITIES, it can be subject to various risks
of loss that are different from risks of investing in securities of U.S.
companies. These include losses due to fluctuating currency values, less liquid
trading markets, political and economic instability, less publicly available
company information, changes in U.S. or foreign tax or currency laws, and
changes in monetary policy.
ZERO COUPON BONDS are debt obligations issued without any requirement for the
periodic payment of interest. They are issued at a significant discount from
face value and tend to be more volatile than conventional debt securities.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
41
<PAGE> 45
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over a ten year period and by showing how the
Fund's average annual returns for one, five and ten years compare to those of a
broad-based securities market index. Performance figures for Class A shares,
first offered on January 3, 1995, include the historical performance of Class B
shares from inception up to December 31, 1994. Performance figures for Class C
shares, first offered on September 1, 1998, include the historical performance
of Class B shares from inception up to August 31, 1998. Performance data for the
classes after these dates vary based on differences in their expense structures.
Sales loads are not reflected in the bar chart. If they were, returns would be
less than those shown. As with all mutual funds, past performance is not
necessarily an indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
STRATEGIC VALUE FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
Strategic Value Fund
Class A
Class B
Class C
S&P 500 Index*
</TABLE>
* "S&P 500(R)" and "500" are trademarks of The McGraw-Hill Companies, Inc. The
S&P 500 Index is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
STRATEGIC VALUE FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 5.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees % % %
Distribution and/or Service
(12b-1) Fees(2) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
42
<PAGE> 46
EQUITY INDEX FUND
INVESTMENT OBJECTIVE -- The Equity Index Fund's investment objective is to seek
to provide investment results that correspond to the total return performance
(and reflect reinvestment of dividends) of publicly traded common stocks
represented by the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500 Index" or the "Index").
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 80% of net
assets in stocks in the S&P 500 Index in the same proportion as they are
represented in the S&P 500 Index, to the extent feasible.
INVESTMENT PROCESS -- Unlike other funds which generally seek to beat market
averages often with unpredictable results, index funds seek to match their
respective indices. No attempt is made to manage the portfolio in the
traditional sense using economic, financial and market analysis. Monitor Capital
Advisors, Inc., the Fund's Sub-Adviser, uses statistical techniques to determine
which stocks are to be purchased or sold to replicate the S&P 500 Index to the
extent feasible. From time to time, adjustments may be made in the Fund's
portfolio because of changes in the composition of the S&P 500 Index, but such
changes should be infrequent. The correlation between the performance of the
Fund and the S&P 500 Index is expected to be at least 0.95. A correlation of
1.00 would indicate perfect correlation, which would be achieved when the net
asset value of the Fund, including the value of its dividend and capital gains
distributions, increases or decreases in exact proportion to changes in the S&P
500 Index.
- ------------
"Standard & Poor's(R)", "S&P(R)", "500", "Standard & Poor's 500" and "S&P
500(R)" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by Monitor Capital Advisors, Inc. Standard & Poor's does not sponsor,
endorse, sell or promote the Fund or represent the advisability of investing in
the Fund. The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Typically, companies included in the
S&P 500 Index are the largest and most dominant firms in their respective
industries.
The Fund's investments also include stock index futures to replicate the S&P 500
Index and for cash management purposes.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings. The
Fund's ability to mirror the S&P 500 Index may be affected by, among other
things, transactions costs, changes in either the makeup of the S&P 500 Index or
number of shares outstanding for the components of the S&P 500 Index, and the
timing and amount of contributions to, and redemptions from, the Fund by
shareholders. If the value of the S&P 500 Index declines, the net asset value of
shares of the Fund will also decline.
The Fund's principal investments include DERIVATIVES such as stock index
futures. The Fund may use derivatives to try to enhance returns or reduce the
risk of loss (hedge) of certain of its holdings. Regardless of the purpose, the
Fund may lose money using derivatives. The derivatives may increase the
volatility of the Fund's net asset value and may involve a small investment of
cash relative to the magnitude of risk assumed.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
GUARANTEE -- This Fund comes with an unconditional guarantee from NYLIFE, Inc.
that, 10 years from your date of purchase, the net asset value of a unit (equal
to the NAV of a Fund share when purchased, plus the value of all cumulative
reinvested dividends and distributions attributable to such share paid during
the 10-year period) will not be less than the price you paid for the Fund share.
43
<PAGE> 47
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over a ten year period and by showing how the
Fund's average annual returns for one, five and ten years compare to those of a
broad-based securities market index. Sales loads are not reflected in the bar
chart. If they were, returns would be less than those shown. As with all mutual
funds, past performance is not necessarily an indication of how the Fund will
perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
EQUITY INDEX FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
Equity Index Fund
Class A
S&P 500 Index*
</TABLE>
* "S&P 500(R)" and "500" are trademarks of The McGraw-Hill Companies, Inc. The
S&P 500 Index is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
EQUITY INDEX FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 3.00% N/A N/A 1 year $ N/A N/A N/A N/A
3 years $ N/A N/A N/A N/A
5 years $ N/A N/A N/A N/A
10 years $ N/A N/A N/A N/A
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees %
Distribution and/or Service
(12b-1) Fees(2) %
Other Expenses %
---
Total Fund Operating
Expenses %
===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
44
<PAGE> 48
INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE -- The International Equity Fund's investment objective is
to provide long-term growth of capital commensurate with an acceptable level of
risk by investing in a portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of
total assets in equity securities of issuers, wherever organized, who do
business mainly outside the U.S. Investments will be made in a variety of
countries, with a minimum of five countries other than the United States. This
includes countries with established economies as well as emerging market
countries that MacKay-Shields Financial Corporation, the Fund's Sub-Adviser,
believes present favorable opportunities.
INVESTMENT PROCESS -- In pursuing the Fund's investment strategy, the Fund's
Sub-Adviser seeks to identify investment opportunities by beginning with country
selection. Local currencies are then assessed for upside potential and downside
risk. Finally, individual securities are evaluated based on the financial
condition and competitiveness of individual companies. In making investments in
foreign markets, the Sub-Adviser considers several factors including prospects
for currency exchange, interest rates, inflation, relative economic growth and
governmental policies.
As part of its investment strategy, the Fund may buy and sell currency on a spot
basis and enter into foreign currency forward contracts for hedging purposes or
to increase the Fund's investment return. In addition, the Fund may buy foreign
currency options, securities and securities index options, foreign currency
options, and enter into swap agreements and futures contracts and related
options. These techniques may be used for any legally permissible purpose
including to increase the Fund's return.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
Since the Fund invests in FOREIGN SECURITIES, it can be subject to various risks
of loss that are different from risks of investing in securities of U.S.
companies. These include losses due to fluctuating currency values, less liquid
trading markets, political and economic instability, less publicly available
company information, changes in U.S. or foreign tax or currency laws, and
changes in monetary policy. The risks are likely to be greater in emerging
market countries than in developed market countries.
The Fund's investments include DERIVATIVES such as options, futures, forwards,
and swap agreements. The Fund may use derivatives to try to enhance returns or
reduce the risk of loss (hedge) of certain of its holdings. Regardless of the
purpose, the Fund may lose money using derivatives. The derivatives may increase
the volatility of the Fund's net asset value and may involve a small investment
of cash relative to the magnitude of risk assumed.
TEMPORARY-DEFENSIVE INVESTMENTS -- In unusual market conditions, the Fund may
invest all or a portion of its assets in equity securities of U.S. issuers,
investment grade notes and bonds and cash and cash equivalents.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
45
<PAGE> 49
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over a ten year period and by showing how the
Fund's average annual returns for one, five and ten years compare to those of a
broad-based securities market index. Performance figures for Class A shares,
first offered on January 3, 1995, include the historical performance of Class B
shares from inception up to December 31, 1994. Performance figures for Class C
shares, first offered on September 1, 1998, include the historical performance
of Class B shares from inception up to August 31, 1998. Performance data for the
classes after these dates vary based on differences in their expense structures.
Sales loads are not reflected in the bar chart. If they were, returns would be
less than those shown. As with all mutual funds, past performance is not
necessarily an indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
INTERNATIONAL EQUITY FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
International Equity Fund
Class A
Class B
Class C
Morgan Stanley Capital
International EAFE Index*
</TABLE>
* The Morgan Stanley Capital International Europe, Australia, Far East
Index--the EAFE Index--is an unmanaged, capitalization-weighted index
containing approximately 1,200 equity securities of companies located outside
the U.S.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
INTERNATIONAL EQUITY FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 5.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees % % %
Distribution and/or Service
(12b-1) Fees(2) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
46
<PAGE> 50
VALUE FUND
INVESTMENT OBJECTIVE -- The Value Fund's investment objective is to realize
maximum long-term total return from a combination of capital growth and income.
The Fund is not designed or managed primarily to produce current income.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of net
assets in common stocks which:
- - the Sub-Adviser believes were "undervalued" (selling below their value) when
purchased;
- - typically pay dividends, although there may be non-dividend paying stocks if
they meet the "undervalued" criteria; and
- - are listed on a national securities exchange or are traded in the
over-the-counter market.
INVESTMENT PROCESS -- In pursuing the Fund's investment strategy, MacKay-Shields
Financial Corporation, the Fund's Sub-Adviser, emphasizes investment in
securities which are, in its opinion, undervalued at the time of purchase. The
Sub-Adviser's value investment process focuses on such factors as low price to
earnings and price to cash flow ratios, financial strength, and earnings
predictability. If, in the Sub-Adviser's opinion, a stock has reached its full
value, it will usually be sold and replaced by securities considered to be
undervalued. The Sub-Adviser also emphasizes investment in dividend-paying
stocks listed on a national securities exchange or traded in the
over-the-counter market, although the Fund may invest in non-dividend paying
stock, based on the Sub-Adviser's judgment.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
The principal risk of investing in the value stocks in which the Fund invests is
that they may never reach what the Sub-Adviser believes is their full value or
that they may even go down in value. In addition, different types of stocks tend
to shift in and out of favor depending on market and economic conditions and
therefore the Fund's performance may be lower or higher than that of funds that
invest in other types of equity securities (such as those emphasizing growth
stocks).
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
47
<PAGE> 51
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over a ten year period and by showing how the
Fund's average annual returns for one, five and ten years compare to those of a
broad-based securities market index. Performance figures for Class A shares,
first offered on January 3, 1995, include the historical performance of Class B
shares from inception up to December 31, 1994. Performance figures for Class C
shares, first offered on September 1, 1998, include the historical performance
of Class B shares from inception up to August 31, 1998. Performance data for the
classes after these dates vary based on differences in their expense structures.
Sales loads are not reflected in the bar chart. If they were, returns would be
less than those shown. As with all mutual funds, past performance is not
necessarily an indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
VALUE FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
Value Fund
Class A
Class B
Class C
S&P 500 Index*
</TABLE>
* "S&P 500(R)" and "500" are trademarks of The McGraw-Hill Companies, Inc. The
S&P 500 Index is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS CLASS CLASS CLASS CLASS CLASS
VALUE FUND
C
B
ASSUMING ASSUMING
SHAREHOLDER FEES (FEES PAID A B C REDEMPTION REDEMPTION
DIRECTLY A ASSUMING NO AT THE END ASSUMING NO AT THE END
FROM YOUR INVESTMENT) EXPENSES AFTER REDEMPTION OF EACH PERIOD REDEMPTION OF EACH PERIOD
--------------- --- ---- --- ----
Maximum Sales Charge (Load)
Imposed on Purchases of
Shares (as a percentage
of offering price) 5.50% None None 1 year $ $ $ $ $
3 years $ $ $ $ $
5 years $ $ $ $ $
10 years $ $ $ $ $
Maximum Deferred Sales
Charge (Load) (as a
percentage of redemption
proceeds)(1) None 5.00% 1.00%
Exchange Fee * * *
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT
ARE DEDUCTED FROM FUND
ASSETS)
Management Fees % % %
Distribution and/or Service
(12b-1) Fees(2) % % %
Other Expenses % % %
--- --- ---
Total Fund Operating
Expenses % % %
=== === ===
</TABLE>
* Except as to certain accounts for which tracking data is not available, after
five exchanges per calendar year, a $10 fee will be imposed.
1. Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of
purchase. The amount of the contingent deferred sales charge applicable to
Class B shares will depend on the number of years since the shareholder
purchased the shares being redeemed. See "Sales Charges and Distribution
Fees-Contingent Deferred Sales Charge, Class B and Class C." A contingent
deferred sales charge of 1.00% will be imposed on redemptions of Class C
shares effected within one year of the date of purchase.
2. Because the distribution fee is an annual fee charged against the assets of a
Fund, long-term shareholders may indirectly pay an amount that is more than
the economic equivalent of paying other types of sales charges. For a
description of the distribution plans adopted by the Funds, see "Sales
Charges and Distribution Fees."
48
<PAGE> 52
More About Investment Strategies and Risks
Information about each Fund's principal investments, investment practices and
principal risks appears at the beginning of the prospectus. The information
below further describes the principal investments, investment practices and
risks pertinent to a Fund.
DERIVATIVE SECURITIES
The value of derivatives is based on certain underlying equity or fixed-income
securities, interest rates, currencies or indexes. They may be hard to sell and
are very sensitive to changes in the underlying security, interest rate or
index, and as a result can be highly volatile. If a Sub-Adviser is wrong about
its expectations of changes in interest rates or market conditions, the use of
derivatives could result in a loss. The Fund could also lose money if the
counterparty to the transaction does not meet its obligations. In addition, the
leverage associated with inverse floaters may result in greater volatility in
their market value than other income-producing securities. With respect to
mortgage-backed and asset-backed securities, if interest rates fall, the
underlying mortgages and debt may be paid off reducing the value of the Fund's
investments. With forward commitments the security could be worth less when it
is issued than the price the Fund agreed to pay when it made the commitment. In
addition, with swap agreements, there is a risk that the other party could go
bankrupt and the Fund would lose the value of the security it should have
received in the swap.
FOREIGN SECURITIES
Foreign investments could be more difficult to sell than U.S. investments. They
also may subject the Fund to risks different from investing in domestic
securities. Investments in foreign securities involve difficulties in receiving
or interpreting financial and economic information, possible imposition of
taxes, higher brokerage and custodian fees, possible currency exchange controls
or other government restrictions, including possible seizure or nationalization
of foreign deposits or assets. Foreign securities may also be less liquid and
more volatile than U.S. securities. There may also be difficulty in invoking
legal protections across borders. In addition, investment in emerging market
countries presents risks in greater degree than those presented by investment in
foreign issuers in countries with developed securities markets and more advanced
regulatory systems.
Some foreign securities are issued by companies organized outside the United
States and are traded only or primarily in trading markets outside the United
States. These foreign securities can be subject to most, if not all, of the
risks of foreign investing. Some foreign securities are issued by companies
organized outside the United States but are traded in U.S. securities markets
and are denominated in U.S. dollars. For example, American Depositary Receipts
and shares of some large foreign-based companies are traded on principal U.S.
exchanges. Other securities are not traded in the United States but are
denominated in U.S. dollars. These securities are not subject to all the risks
of foreign investing. For example, foreign trading market or currency risks will
not apply to dollar denominated securities traded in U.S. securities markets.
Many of the foreign securities in which the Funds invest will be denominated in
foreign currencies. Changes in foreign exchange rates will affect the value of
securities denominated or quoted in foreign currencies. Exchange rate movements
can be large and can endure for extended periods of time, affecting either
favorably or unfavorably the value of the Funds' assets. A Fund may, however,
engage in foreign currency transactions to protect itself against fluctuations
in currency exchange rates in relation to the U.S. dollar. See "Risk Management
Techniques."
LENDING OF PORTFOLIO SECURITIES
Portfolio securities may be lent to brokers, dealers and financial institutions
to realize additional income under guidelines adopted by the Board of Trustees.
The risks in lending portfolio securities, as with other extensions of credit,
consist of possible loss of rights in the collateral should the borrower fail
financially. In determining whether to lend securities, a Fund's Sub-Adviser
will consider all relevant facts and circumstances, including the
creditworthiness of the borrower.
MORTGAGE-BACKED AND
ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities are securities whose value is based
on underlying pools of loans that may include interests in pools of lower-rated
debt securities, consumer loans or mortgages, or complex instruments such as
collateralized mortgage obligations and stripped mortgage-backed securities. The
value of these securities may be significantly affected by changes in interest
rates, the market's perception of issuers and the creditworthiness of the
parties involved. The Sub-Adviser's ability to correctly forecast interest rates
and other economic factors correctly will impact the success of investments in
mortgage-backed and asset-backed securities. Some securities may have a
structure that
49
<PAGE> 53
makes their reaction to interest rate changes and other factors difficult to
predict, making their value highly volatile. These securities may also be
subject to prepayment risk and if the security has been purchased at a premium
the amount of some or all of the premium may be lost in the event of prepayment.
MUNICIPAL SECURITIES AND
MUNICIPAL LEASE OBLIGATIONS
The two main types of municipal bonds are "general obligation" and "revenue"
bonds. "General obligation" bonds are secured by the issuer's pledge of its full
faith, credit and taxing power to repay the principal and interest. "Revenue"
bonds are repaid from the revenue of a particular facility (or group of
facilities) or from proceeds of a specific revenue source. (Examples: bonds used
to raise funds for highways, airports and hospitals.)
Municipal lease obligations are tax-exempt securities that may be supported by a
lease or an installment purchase contract issued by state and local government
authorities to acquire funds to obtain the use of a wide variety of equipment
and facilities such as fire and sanitation vehicles, computer equipment and
other capital assets. These obligations, which may be secured or unsecured, are
not general obligations and may be less likely to repay principal and interest.
RISK MANAGEMENT TECHNIQUES
Various techniques can be used to increase or decrease a Fund's exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices or other factors that affect security values. These techniques may
involve derivative transactions such as buying and selling futures contracts and
options on futures contracts, entering into foreign currency transactions (such
as forward foreign currency exchange contracts and options on foreign
currencies) and purchasing put or call options on securities and securities
indexes.
These practices can be used in an attempt to adjust the risk and return
characteristics of their portfolios of investments. When a Fund uses such
techniques in an attempt to reduce risk it is known as "hedging". If a Fund's
Sub-Adviser judges market conditions incorrectly or employs a strategy that does
not correlate well with the Fund's investments, these techniques could result in
a loss, regardless of whether the intent was to reduce risk or increase return.
These techniques may increase the volatility of a Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. In addition,
these techniques could result in a loss if the counterparty to the transaction
does not perform as promised.
SWAP AGREEMENTS
A Fund may enter into interest rate, index and currency exchange rate swap
agreements to attempt to obtain a desired return at a lower cost than a direct
investment in an instrument yielding that desired return.
Whether a Fund's use of swap agreements will be successful will depend on
whether the Sub-Adviser correctly predicts movements in interest rates, indexes
and currency exchange rates. Because they are two-party contracts and because
they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty. See Tax Status in the SAI for
information regarding the tax considerations relating to swap agreements.
WHEN-ISSUED SECURITIES AND
FORWARD COMMITMENTS
Debt securities are often issued on a when-issued basis. The price (or yield) of
such securities is fixed at the time a commitment to purchase is made, but
delivery and payment for the when-issued securities take place at a later date.
During the period between purchase and settlement, no payment is made by the
Fund and no interest accrues to the Fund. The market value of the when-issued
securities on the settlement date may be more or less than the purchase price
payable at settlement date. Similarly, a Fund may commit to purchase a security
at a future date at a price determined at the time of the commitment. The same
procedures for when-issued securities will be followed.
RISKS OF INVESTING IN HIGH YIELD SECURITIES
("JUNK BONDS")
Debt securities rated lower than Baa by Moody's or BBB by S&P or, if not rated,
determined to be of equivalent quality by the Sub-Adviser are sometimes referred
to as junk bonds and are considered speculative.
Investment in high yield bonds involves special risks in addition to the risks
associated with investments in higher rated debt securities. High yield bonds
may be regarded as predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. Moreover, such
securities may, under certain circumstances, be less liquid than higher rated
debt securities.
50
<PAGE> 54
SPECIAL RISK CONSIDERATIONS FOR THE
CALIFORNIA TAX FREE FUND AND
NEW YORK TAX FREE FUND
CALIFORNIA MUNICIPAL SECURITIES. Investors should be aware that certain
California Constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in certain adverse
consequences affecting California municipal securities. For instance, certain
provisions of the California Constitution and statutes that limit the taxing and
spending authority of California governmental entities may impair the ability of
the issuers of some California municipal securities to maintain debt service on
their obligations. Other measures affecting the taxing or spending authority of
California or its political subdivisions may be approved or enacted in the
future.
NEW YORK MUNICIPAL SECURITIES. Investors should be aware that New York State and
New York City face long-term economic problems which could seriously affect
their ability and that of other issuers of New York municipal securities to meet
their financial obligations. The credit standings of New York State and of
certain local governments (including New York City) have been, and could be
further, reduced.
For a discussion of certain matters relating to the fiscal policies and
financial condition of the states of California and New York and their political
subdivisions, see the SAI.
THE EQUITY INDEX FUND GUARANTEE
NYLIFE Inc. ("NYLIFE"), a New York corporation and a wholly owned subsidiary of
New York Life Insurance Company ("New York Life"), will guarantee
unconditionally and irrevocably pursuant to a Guaranty Agreement between NYLIFE
and the Equity Index Fund (the "Guarantee") that if, exactly 10 years from the
date of purchase (the "Guarantee Date"), the net asset value of a unit equal to
the net asset value of a Fund share when purchased, plus the value of all
dividends and distributions paid, including cumulative reinvested dividends and
distributions attributable to such share paid during that 10-year period
("Guaranteed Share"), is less than the public offering price initially paid for
the share ("Guaranteed Amount"), NYLIFE will pay for disbursement to
shareholders an amount equal to the difference between the Guaranteed Amount for
each such share and the net asset value of each such Guaranteed Share
outstanding and held by shareholders as of the close of business on the
Guarantee Date. There is no charge to the Fund or its Shareholders for the
Guarantee.
If the Fund pays a dividend or distribution in cash to all Fund shareholders,
the amount of the distribution shall reduce the Guaranteed Amount with respect
to each Guaranteed Share in the amount of such cash distribution. Fund shares
may be redeemed or exchanged by shareholders prior to their Guarantee Date.
However, any such redeemed or exchanged shares will lose the benefit of the
Guarantee.
Following the Guarantee Date, the shares of the Equity Index Fund will be
subject to those risks normally associated with an investment in shares of a
mutual fund that invests in securities represented in the Index.
NYLIFE is a New York holding company incorporated on January 26, 1984. Audited
financial statements for NYLIFE for its most recent fiscal year ended December
31, 1998, appear in the SAI.
New York Life is a mutual life insurance company. Payment obligations under the
Guarantee will be solely the obligations of NYLIFE. None of the Fund, New York
Life, MainStay Management Inc., Monitor, NYLIFE Distributors Inc., NYLIFE
Securities Inc., any of their affiliates nor any other party is undertaking any
obligation to the Fund or its shareholders with respect to the Guarantee. New
York Life is not obligated to pay any claim under the Guarantee or to make
additional capital contributions to NYLIFE.
For more information on the Guarantee, see the SAI.
OTHER INFORMATION
The services provided to the Funds by the Manager, the Sub-Adviser and the
Funds' other service providers are dependent on those service providers'
computer systems. Many computer software and hardware systems in use today
cannot distinguish between the year 2000 and the year 1900 because of the way
dates are encoded and calculated (the "Year 2000 Issue"). The failure to make
this distinction could have a negative implication on handling securities
trades, pricing and account services. The Manager, the Sub-Adviser and the
Funds' other service providers are taking steps that each believes are
reasonably designed to address the Year 2000 Issue with respect to the computer
systems that they use. The Funds have no reason to believe these steps will not
be sufficient to avoid any material adverse impact on the Funds, although there
can be no assurances. The costs or consequences of incomplete or untimely
resolution of the Year 2000 Issue are unknown to the Manager, the Sub-Adviser
and the Funds' other service providers at this time but could have a material
adverse impact on the operations of the Funds and the Manager, the Sub-Adviser
and the Funds' other service providers.
51
<PAGE> 55
Sales Charges and Distribution Fees
Class A, Class B and Class C shares differ only in each bears its own service
and distribution expenses (Rule 12b-1 fees), and any other specific class
expenses the Board of Trustees may approve.
There is no sales charge on shares of the Money Market Fund. Your investment
professional can help you determine which type of sales charge would be better
for you, based on how much and how long you wish to invest and certain other
factors. The sales charges are outlined in the table below.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
<S> <C> <C> <C> <C> <C> <C>
You will pay a sales charge when you buy
Class A shares as follows:
SALES CHARGE AS
A PERCENTAGE OF:
------------------
NET
AMOUNT OF OFFERING AMOUNT
PURCHASE PRICE INVESTED
--------------------------------------
Less than $100,000.... 4.5% 4.71%
$100,000 to
$249,999.............. 3.50% 3.63%
$250,000 to
$499,999.............. 2.50% 2.56%
$500,000 to
$999,999.............. 2.00% 2.04%
$1,000,000 or more*... None None
--------------------------------------
* No sales charge applies on investments
of $1 million or more, but a contingent
deferred sales charge of 1% is imposed
on certain redemptions of such shares
within one year of the date of purchase.
See "Reduced Sales Charges on Class A
Shares--Contingent Deferred Sales
Charge, Class A."
You pay no up-front sales charge, your full You pay no up-front sales charge,
investment goes toward buying shares, so your full investment goes toward
you start off owning more shares. buying shares, so you start off
owning more shares.
Although an investor will not pay an
initial sales charge on investments of
$1,000,000 or more, NYLIFE Distributors
Inc., the Funds' distributor, will pay,
from its own resources, a commission to
dealers on such investments.
You will pay the offering price which is
net asset value plus the sales charge.
Since some of your investment goes to pay
an up-front sales charge, you start owning
fewer shares. But, you're usually better
off paying up-front if you:
- plan to own the shares for an extended
period of time, since the ongoing Rule
12b-1 fees on Class B and Class C shares
will eventually exceed the cost of the
up-front sales charge; or
- qualify for a reduced sales charge.
</TABLE>
UP-FRONT
SALES CHARGE
The Distributor or its affiliates, at their expense, also may from time to time
provide additional promotional incentives and/or compensation to dealers who
sell Fund shares or provide services to shareholders.
52
<PAGE> 56
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
<S> <C> <C> <C> <C> <C> <C>
You pay lower ongoing Rule 12b-1 You pay higher ongoing Rule 12b-1 You pay higher ongoing Rule 12b-1
fees--which means there's more net income fees, which means: fees, which means:
to pay you higher dividends per share. - you receive lower dividends; - you receive lower dividends;
The Rule 12b-1 fee is 0.25%. - your NAV will generally be lower than - your NAV will generally be lower
that of Class A shares; and than that of Class A shares; and
- total performance per share will be lower - total performance per share will
than the Class A shares. be lower than the Class A
The Rule 12b-1 fee includes 0.75% (0.25% shares.
for California Tax Free, New York Tax Free The Rule 12b-1 fee includes 0.75%
and Tax Free Bond Funds) for distribution (0.25% for California Tax Free,
and 0.25% for service. New York Tax Free and Tax Free
Bond Funds) for distribution and
0.25% for service.
Certain redemptions of Class A shares You will pay a contingent deferred sales
purchased at NAV will be subject to a 1% charge if you sell shares within the next 6
contingent deferred sales charge if made years. The rates are:
within 1 year of purchase.
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
FOR SHARES OF AMOUNT REDEEMED
SOLD IN THE SUBJECT TO THE CHARGE
--------------------------------------
First Year...... 5.0%
Second Year..... 4.0%
Third Year...... 3.0%
Fourth Year..... 2.0%
Fifth Year...... 2.0%
Sixth Year...... 1.0%
Thereafter...... None
--------------------------------------
(There are exceptions. See the SAI.)
You will pay a 1% contingent
deferred sales charge if you sell
your shares within one year from
the date of purchase.
Not applicable. Take note: Take note:
If you hold Class B shares for eight years Unlike Class B shares, Class C
they will automatically convert to Class A shares will never convert to Class
shares, which pay lower Rule 12b-1 fees, at A shares. As a result, Class C
the end of the calendar quarter eight years shareholders
after the date you purchased your shares. pay higher ongoing Rule 12b-1
If you owned your Class B shares on October fees for the life of their
24, 1997, the date the conversion feature investment.
was implemented, they will be converted on
December 31, 2005. We expect all share
conversions to be made on a tax-free basis.
If this cannot be reasonably assured, the
Trustees reserve the right to modify or
eliminate this share class conversion
feature.
</TABLE>
12B-1 FEES
CDSC
CONVERSION
RULE 12B-1 PLANS
Each Fund, other than the Money Market Fund, has adopted a distribution plan
under Rule 12b-1 under the Investment Company Act for each Class of shares.
53
<PAGE> 57
Rule 12b-1 distribution and service fees are paid to the Distributor monthly and
calculated on a Fund's average daily net assets of a given class at the annual
rate in the chart. The Class A Rule 12b-1 fee may be paid for distribution or
service activities as designated by the Distributor. The Class B and C Rule
12b-1 distribution fees are paid for distribution activities. The Class B and C
service fee is paid to the Distributor for providing shareholders with personal
continuing services and maintaining shareholder accounts. Because Rule 12b-1
fees are on-going, over time they will increase the cost of an investment in the
funds and may cost more than other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE, CLASS B AND CLASS C
A contingent deferred sales charge will be imposed on redemptions of Class B and
C shares of the Funds, at the rates in the table above, at the time of any
redemption by a shareholder which reduces the current value of the shareholder's
Class B or C account in any Fund to an amount which is lower than the amount of
all payments by the shareholder for the purchase of Class B shares in that Fund
during the preceding six years or Class C shares in that Fund for the preceding
year. However, no such charge will be imposed to the extent that the net asset
value of the Class B or C shares redeemed does not exceed (a) the current
aggregate net asset value of Class B or C shares of that Fund purchased more
than six years prior to the redemption for Class B shares or more than one year
prior to the redemption for Class C shares, plus (b) the current aggregate net
asset value of Class B or C shares of that Fund purchased through reinvestment
of dividends or distributions, plus (c) increases in the net asset value of the
investor's Class B shares of that Fund above the total amount of payments for
the purchase of Class B shares of that Fund made during the preceding six years
for Class B shares or one year for Class C shares. The amount of any contingent
deferred sales charge will be paid to and retained by the Distributor.
54
<PAGE> 58
Account Policies: Buying, Selling and Exchanging Shares
General Instructions: Buying and Selling Shares
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
Complete your application and Send additional investments directly to: Write a letter of instruction that
send it with your check to your includes:
investment professional. The MainStay Funds
P.O. Box 8401 - your name(s) and signature(s)
Boston, MA 02266-8401 - your account number
- fund name and class of shares
Include your fund, account number and - dollar amount you want to sell
class of shares with your check.
Obtain a signature guarantee or other
documentation, if required.
Mail your request to:
The MainStay Funds
P.O. Box 8401
Boston, MA 02266-8401
Send overnight packages to:
You must ask to sell your shares in
writing and have your signature
guaranteed for:
- amounts of $100,000 or more
- accounts which have had a change of
address within 30 days
- redemptions sent to an address other
than the address of record made
payable to someone other than the
account holder
A signature guarantee helps protect
against fraud. You can obtain one from
most banks and securities dealers, but
not from a notary public. For joint
accounts, each signature must be
guaranteed. Please call MainStay
Shareholder Services, Inc., the Fund's
transfer agent ("MSS"), at
1-800-MAINSTAY to ensure that your
signature will be guaranteed by an
appropriate institution.
</TABLE>
IN WRITING
55
<PAGE> 59
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
If your purchase is at least WIRE GETTING YOUR MONEY BY WIRE TRANSFER
$5,000, have your investment
professional call in your Have your investment professional call Be sure MainStay has your bank account
order. Your application and in your order and wire your investment information on file. Call us to
payment must be received in to: request your transaction. Proceeds
good order within 3 business will be wired to your bank. There is a
days. Money Market Fund shares State Street Bank and Trust Company with $5.00 per wire fee.
may not be purchased by phone. these instructions:
- ABA# 011 0000 28 - Minimum amount: $5,000
- Attn: Custody and Shareholder Services - Authorization: You must select this
- the Fund name and class of shares option on your application initially
- your account number or request it in writing at a later
- name(s) of investor(s) date.
To buy shares the same day, your Generally, after receiving your sell
investment professional must call by order by phone, we will send the
noon and the wire must be received by proceeds by bank wire to your
4:00pm. designated bank account the next
business day, although it may take up
Your investment must be at least $5,000 to 7 days to do so. Your bank may
per fund. Money Market Fund shares may charge you a fee to receive the wire
not be purchased by phone. transfer.
ACH GETTING YOUR MONEY BY CHECK
Call us to request your transaction. A
Eligible investors can purchase shares check will be sent to the address of
by using electronic debits from a record.
designated bank account.
- Maximum amount: $100,000
The check will be payable to the name
(or names) on the account and mailed
to the address on the account. (See
the SAI for more details.)
Telephone redemptions are not
permitted for shares:
- represented by certificates
- bought within the previous 10
calendar days, or
- owned by someone whose address of
record has changed within the
previous 30 days
- equaling an amount greater than
$100,000
ACH
Eligible investors may redeem shares
via ACH.
</TABLE>
BY TELEPHONE
56
<PAGE> 60
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
Not applicable. AUTOINVEST
Investors who are authorized for
AutoInvest can call MSS toll free at
1-800-MAINSTAY to make scheduled
systematic investments from a designated
bank account or to buy shares by using
electronic debits from a designated bank
account.
PAYROLL DEDUCTION
For making automatic investments through
a payroll deduction.
DIVIDEND REINVESTMENT
For automatically reinvesting the
dividends and distributions from one
MainStay Fund in the same or another
MainStay Fund.
SYSTEMATIC WITHDRAWAL PLAN
To make regular redemptions, choose
the plan when you open your account or
call MSS to request a form to add the
plan. Complete the form, specifying
the amount and frequency of
withdrawals you would like.
Withdrawals must be at least $100.
Requires at least $10,000 in the
account at the time of request and
shares must not be in certificate
form.
CHECKWRITING SERVICES
For Money Market Fund only. Not
available for IRAs or qualified
retirement plans.
SYSTEMATIC EXCHANGES
For regular, systematic exchanges from
one MainStay Fund to the same class of
another.
TELEPHONE EXCHANGES
For telephone exchanges from one
MainStay Fund to another.
</TABLE>
AUTOMATICALLY
57
<PAGE> 61
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
You buy shares at net asset You may sell shares by calling or
value ("NAV") (plus, for Class writing MSS or your investment
A shares, any applicable sales professional. MSS must receive your
charge). NAV is generally order with all the information,
calculated as of the close of signatures and documentation necessary
trading on the New York Stock to sell your shares. If you have share
Exchange (usually 4:00 pm certificates, you must return them
Eastern time, except for the with your redemption request.
Money Market Fund, which is
calculated at noon) everyday Your shares will be sold at the next
the Exchange is open. When you NAV calculated after MSS accepts your
buy shares, you must pay the order. MainStay will make the payment,
next NAV calculated after minus any deferred sales charge,
MainStay Shareholder Services, within 7 days after receiving your
Inc. the Funds' transfer agent request in good order.
("MSS") accepts your order.
This means all the necessary
information, signatures and
documentation has been
received.
VALUING SECURITIES
The Funds' investments are
valued based on current market
value, except for the Money
Market Fund, which uses the
amortized cost method of
valuation. Events affecting the
values of portfolio securities
which occur between the time
their prices are determined and
the close of the Exchange will
not be reflected in the Funds'
calculation of NAV unless the
Sub-Adviser deems that the
particular event would
materially affect NAV, in which
case an adjustment will be
made.
</TABLE>
NAV
58
<PAGE> 62
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
When you sell Class B or Class C
shares, the Fund will sell additional
There are several ways to If you buy shares by check and quickly shares to cover the cost of any
reduce sales charges. These decide to sell them, the Fund will applicable sales charge. If you don't
include using a reinvestment reject your redemption order if your own enough shares to do this, the
privilege when you redeem check has not cleared. amount you receive will be reduced by
shares, combining new purchases the amount of the sales charge.
with previous purchases,
signing a letter of intent or There will be no redemption, however,
by making large investments during any period in which the right
when you buy shares. For more of redemption is suspended or date of
information, call payment is postponed because the New
1-800-MAINSTAY or your York Stock Exchange is closed or
investment professional. trading on the Exchange is restricted
or the SEC deems an emergency to
MINIMUM INVESTMENTS* exist.
REDEMPTIONS-IN-KIND
Initial $500 (except for Money
Market Fund and Equity The Trust reserves the right to pay
Index Fund, which is certain redemptions, either totally or
$1,000) partially, by a distribution in kind
Subsequent $50 of securities (instead of cash) from
the applicable Fund's portfolio. See
*The minimum initial investment the SAI for details.
amount is waived for purchase THE REINVESTMENT PRIVILEGE MAY HELP
by the Trustees, New York Life YOU AVOID SALES CHARGES
and its subsidiaries and their
employees, officers, directors When you sell shares, you have the
or agents. right--for 90 days--to reinvest any or
all of the money in the same class of
IF YOU INVEST $1 MILLION OR any MainStay Fund without paying
MORE, YOU MAY ONLY BUY CLASS A another sales charge (as long as those
SHARES. shares haven't been reinvested once
already). If you've paid a sales
All investments must be in U.S. charge when you redeem you'll receive
dollars and drawn on a U.S. a pro-rata credit for reinvesting.
bank. Except under certain NOTE: REINVESTMENT WON'T RELIEVE YOU
circumstances, third-party OF ANY TAX CONSEQUENCES on gains
checks cannot be accepted. If realized from the sale. The deductions
your check doesn't clear, your for losses may, however, be denied
order will be canceled and you and, in some cases, sales charges may
could be liable for losses or not be taken into account in computing
fees. We also reserve the right gains or losses if the reinvestment
to limit the number of checks privilege is exercised.
processed at one time.
Telephone purchase orders must CONVENIENT, YES . . . BUT NOT RISK-
be at least $5,000 per Fund. FREE
You may not buy shares of the
Money Market Fund by phone. Telephone redemption privileges are
Wires are not accepted when the convenient, but you give up some
New York Stock Exchange or security. When you sign the
banks are closed. application to buy shares, you agree
that neither the MainStay Funds nor
The Fund has the right to close MSS will be liable for following phone
your account if it gets too instructions that they reasonably
small. If there is less than believe are genuine. When using the
$250 in your account ($500 for MainStay Audio Response System, you
the Money Market Fund), the bear the risk of any loss from your
Fund may ask you to increase errors unless the Funds or MSS fail to
your balance. We will give you use established safeguards for your
60 days' written notice so you protection. These safeguards are among
can add to your account and those currently in place at
avoid the redemption. MainStay Funds:
- all phone calls are tape recorded;
and
- written confirmation of every
transaction is sent to your address
of record.
MONEY MARKET FUND CHECKWRITING
You can sell shares of the Money
Market Fund by writing checks for $100
or more. You need to fill out special
forms to set up checkwriting
privileges. You cannot close your
account by writing a check.
</TABLE>
OTHER
59
<PAGE> 63
SHAREHOLDER SERVICES
AUTOMATIC SERVICES
Buying or selling shares automatically is easy with the services described
below. With each service, you select a schedule and amount, subject to certain
restrictions. You can set up most of these services with your application or by
calling 1-800-MAINSTAY for a form.
EXCHANGE PRIVILEGES
Once you open an account, you may exchange shares of the same class between
MainStay Funds without a sales charge. There are three exceptions. You will pay
a sales charge if you:
- - exchange shares of the Money Market Fund for Class A shares of another Fund,
unless you've already paid the sales charge on those shares; or
- - exchange Class B shares out of the Money Market Fund and into another Fund and
redeem within 6 years of the original purchase; or
- - exchange Class C shares out of the Money Market Fund and into another Fund and
redeem within 1 year of the original purchase.
You may not exchange shares between classes. If you sell Class B or Class C
shares and then buy Class A shares, you may pay a deferred sales charge on the
sale of Class B or Class C shares, as applicable, and pay an initial sales
charge on the Class A shares.
When you redeem exchanged shares you will have to pay any applicable sales
charge. For information about CDSC waivers, see the SAI.
IN GENERAL
Selling and exchanging shares may result in a gain or loss and therefore may be
subject to taxation. Consult your tax adviser on the consequences.
MainStay may revise or terminate the systematic withdrawal plan and the exchange
privileges upon written notice. In addition, upon notice, a $5 fee per
redemption may be charged. Five free telephone exchanges per account are
permitted in each calendar year. After that, except as to certain accounts for
which tracking data is not available, a $10 fee will be charged for each
exchange and additional requests may be denied.
GENERAL POLICIES--PURCHASING, SELLING AND EXCHANGING SHARES
Unless you decline telephone privileges on your application, you may be
responsible for any fraudulent telephone order as long as MSS takes reasonable
measures to verify the order.
The Funds reserve the right to:
- - refuse any purchase or exchange request that could adversely affect a Fund or
its operations including those from any individual or group who, in the Fund's
view, is likely to engage in excessive trading
- - change or discontinue its exchange privilege, or temporarily suspend this
privilege during unusual market conditions
- - change its minimum investment amounts
If you invest through a third party (rather than directly with MainStay), the
policies and fees may be different than those described here. Banks, brokers,
401(k) plans, financial advisers and financial supermarkets may charge
transaction fees and may set different minimum investments or limitations on
buying or selling shares. Consult a representative of your plan or financial
institution if you have any questions.
TAX-DEFERRED RETIREMENT PLANS
Shares of each Fund, except the California Tax Free Fund, New York Tax Free Fund
and the Tax Free Bond Fund, may be purchased for retirement plans providing
tax-deferred investments for individuals and institutions. Shares purchased may
be used as investments for established plans or the Distributor may provide plan
documents for selected plans. A plan document must be adopted in order for a
plan to be in existence.
Custodial services are provided for IRA/ROTH IRA/ SEP/SARSEP, SIMPLE IRA and
Education IRA plans, and for 403(b)(7) Custodial Accounts. Plan administration
is also available for select qualified retirement plans.
Contributions made to such plans to the extent provided in federal income tax
law currently in effect, and earnings thereon, will not be taxable to the plan
participant until distribution. An investor should consult with his or her tax
adviser before establishing any tax-deferred retirement plan.
60
<PAGE> 64
Decide How to Receive Your Earnings
TWO KINDS OF EARNINGS
DIVIDENDS AND INTEREST
Most Funds earn either dividends from stocks, interest from bonds and other
securities, or both. A mutual fund, however, always pays this income to you as
"dividends." The dividends paid by each Fund will vary based on the income from
its investments and the expenses incurred by the Fund.
WHEN THE FUNDS PAY
The Money Market Fund declares dividends daily and pays them monthly. The other
Funds in this prospectus declare and distribute any dividends monthly. Dividends
are paid on the first business day of each month after a dividend is declared.
In the Money Market Fund, you begin earning dividends the business day after MSS
receives your investment and is open for business.
CAPITAL GAINS
Funds earn capital gains when they sell securities at a profit.
WHEN THE FUNDS PAY
At the end of each fiscal year, each MainStay Fund matches its gains against its
losses. If the balance results in a gain, the Fund will distribute the gain to
shareholders.
HOW TO TAKE YOUR EARNINGS
You may choose how to receive earnings (and change your choice as often as you
like) by notifying your investment professional (if permitted by the broker-
dealer) or MainStay directly. If you don't make a choice on your application,
your earnings will be automatically reinvested in the same class of shares of
the same Fund. In order to reinvest dividends and/or capital gains in another
Fund, you must have an established account in that class of shares of that Fund.
You don't pay a sales charge on shares bought through the automatic
reinvestment of dividends or capital gains. Here are your choices:
REINVEST EVERYTHING IN:
- - the same Fund; or
- - in another Fund of your choice.
TAKE THE DIVIDENDS IN CASH
Reinvest the capital gains in:
- - the same Fund; or
- - in another Fund of your choice.
TAKE THE CAPITAL GAINS IN CASH
Reinvest the dividends in:
- - the same Fund; or
- - in another Fund of your choice.
TAKE A PERCENTAGE OF THE DIVIDENDS OR CAPITAL GAINS IN CASH AND REINVEST THE
REMAINDER IN:
- - the same Fund.
TAKE EVERYTHING IN CASH
61
<PAGE> 65
Understand the Tax Consequences
MOST OF YOUR DIVIDENDS ARE TAXABLE
Virtually all of the dividends you receive from The MainStay Funds (except the
California Tax Free, New York Tax Free and the Tax Free Bond Funds) are taxable,
whether you take them as cash or automatically reinvest them. Some dividends
will be taxable as long-term capital gains.
TAX-FREE DIVIDENDS ARE DIFFERENT
Dividends earned from tax-exempt securities will usually be free from federal
tax. Your MainStay year-end statement will provide full tax information.
MainStay keeps track of the tax status of all dividends and distributions paid
by the Funds and will mail your tax report each year by January 31. This report
will tell you which dividends and redemptions should be treated as taxable
ordinary income, which, if any, as tax-exempt income, and which, if any, as
long- and short-term capital gains.
RETIREMENT PLANS
None of the dividends earned in a tax-deferred retirement plan are taxable until
distributed from the plan.
TAXES ON FOREIGN INVESTMENT INCOME
(Mainly from the International Bond, Global High Yield and Strategic Income
Funds.) Income earned from investments in foreign countries may be withheld by
those countries as income taxes. Under certain circumstances, the Fund may elect
to pass along tax credits or deductions to you for foreign income taxes paid,
although there are no assurances that the Fund will be able to do so, or that
the credits or deductions will result in a tax benefit to you.
EXCHANGES
An exchange of shares of one fund for shares of another will be treated as a
sale of shares of the first fund and a purchase of shares of the second fund.
Any gain on the transaction may be subject to federal income tax.
You should be aware that if you buy shares shortly before a dividend payment a
part of your investment will be returned in the form of a dividend which may
be taxable income for you.
c
SEEK ASSISTANCE
Your investment professional is always available to help you keep your
investment goals coordinated with your tax considerations. You should,
however, rely on your tax adviser for tax counsel.
For additional information on taxation, see the SAI.
DON'T OVERLOOK SALES CHARGES
The amount you pay in sales charges reduces gains and increases losses for tax
purposes.
ALL INCOME AFFECTS YOUR BENEFITS
The government includes tax-exempt income when computing the amount of social
csecurity or other benefits that are subject to tax.
"TAX FREE" RARELY MEANS "TOTALLY TAX-FREE"
- The California Tax Free, New York Tax Free and Tax Free Bond Funds (or any
tax-free fund) may earn taxable income--in other words, you may have taxable
income even from a generally tax-free fund.
- Tax-exempt dividends may still be subject to state and local taxes.
- Any time you sell shares--even shares of a tax-free fund--you will be
subject to tax on any gain (the rise in the share price).
- If you sell shares of a tax-free fund after receiving a tax-exempt dividend,
and you have held the shares for six months or less, then you may not be
allowed to claim a loss on the sale.
- If you sell shares in a tax-free fund before you become entitled to receive
tax-exempt interest as a dividend, the amount that would have been treated
as a tax-free dividend will instead be treated as a taxable part of the
sales proceeds.
- Some tax-exempt income may be subject to the alternative minimum tax.
62
<PAGE> 66
Know With Whom You're Investing
WHO RUNS THE FUND'S DAY-TO-DAY BUSINESS?
MainStay Management, Inc., 300 Interpace Parkway, Building A, Parsippany, NJ
07054, serves as the Funds' manager, handling business affairs for the Funds.
MainStay Management, Inc. is a corporation organized under the laws of Delaware
and is an indirect wholly owned subsidiary of New York Life Insurance Company.
The Manager provides offices and conducts clerical, recordkeeping and
bookkeeping services, and keeps most of the financial and accounting records
required for the Funds. The Manager has delegated its portfolio management
responsibilities to the Sub-Adviser.
The Manager pays the salaries and expenses of all personnel affiliated with the
Funds, and all the operational expenses that aren't the responsibility of the
Funds, including the fee paid to the Sub-Adviser.
For the fiscal year ended December 31, 1998, the Trust, on behalf of each Fund,
paid the Manager an aggregate fee for services performed as a percentage of the
average daily net assets of that Fund as follows:
<TABLE>
<CAPTION>
RATE PAID FOR
THE YEAR ENDED
DECEMBER 31,
1998
- ----------------------------------------------------------------
<S> <C>
California Tax Free Fund........................ %
Global High Yield Fund.......................... %*
Government Fund................................. %
High Yield Corporate Bond Fund.................. %
International Bond Fund......................... %
Money Market Fund............................... %
New York Tax Free Fund.......................... %
Strategic Income Fund........................... %
Small Cap Growth Fund........................... %
Small Cap Value Fund............................ %
Blue Chip Growth Fund........................... %
Capital Appreciation Fund....................... %
Equity Index Fund............................... %
International Equity Fund....................... %
Convertible Fund................................ %
Equity Income Fund.............................. %
Growth Opportunities Fund....................... %
Research Value Fund............................. %
Strategic Value Fund............................ %
Total Return Fund............................... %
Value Fund...................................... %
- ----------------------------------------------------------------
</TABLE>
* The Global High Yield Fund has been in existence for less than one year. The
Fund's management fee is an annual percentage of 0.70% of average daily net
assets. The Manager has agreed to voluntarily reduce its fee payable to an
annual percentage of 0.50% of average daily net assets.
Each Fund, pursuant to an Accounting Agreement with the Manager, will bear an
allocable portion of the Manager's cost of performing certain bookkeeping and
pricing services. Each Fund pays the Manager a monthly fee for services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets.
The Manager is not responsible for records maintained by the Funds' Custodians,
Transfer Agent, Dividend Disbursing and Shareholder Servicing Agent, or Sub-
Adviser.
WHO MANAGES YOUR MONEY?
MacKay-Shields Financial Corporation, 9 West 57th St., New York, NY 10019, is
the Sub-Adviser to all the Funds in this prospectus. The firm was incorporated
in 1969 as an independent investment advisory firm and was privately held until
1984 when it became a wholly owned but autonomously managed subsidiary of New
York Life Insurance Company. As of December 31, 1997, MacKay-Shields managed
over $28.8 billion in assets.
Under the supervision of the Manager, the Sub-Adviser is responsible for making
the specific decisions about buying, selling and holding securities; selecting
brokers and brokerage firms to trade for them; maintaining accurate records;
and, if possible, negotiating favorable commissions and fees with the brokers
and brokerage firms. For these services, the Sub-Adviser is paid a monthly fee
by the Manager, not the Funds. (See the SAI for a breakdown of fees.) The Funds'
Trustees oversee the management and operations of the Funds.
63
<PAGE> 67
PORTFOLIO MANAGERS -- BIOGRAPHIES
RAVI AKHOURY -- Mr. Akhoury has managed the Government, California Tax Free, New
York Tax Free and Tax Free Bond Funds since inception. Mr. Akhoury joined
MacKay-Shields as a Director in 1984, became Managing Director in 1988,
President and member, Board of Directors in 1989, Chairman and CEO in 1992 and
Senior Managing Director of MacKay-Shields and Executive Vice President of New
York Life Insurance Company and Chief Executive Officer of New York Life Asset
Management, a division of New York Life Insurance Company, in 1997. Mr. Akhoury
is also a manager of the Total Return Fund.
NEIL FEINBERG -- Mr. Feinberg has managed the Strategic Income Fund since
inception. Mr. Feinberg is a Director of MacKay-Shields. He joined the firm in
1992. Mr. Feinberg is also a manager of the Convertible, Strategic Value and
Equity Income Funds.
JAMES FLOOD -- Mr. Flood has managed the California Tax Free, New York Tax Free
and Tax Free Bond Funds since 1992. Mr. Flood is a Director of MacKay-Shields.
He joined the firm in 1992.
DENIS LAPLAIGE -- Mr. Laplaige has managed the High Yield Corporate Bond Fund
since 1991. Mr. Laplaige is President, Senior Managing Director and Chief
Investment Officer of MacKay-Shields. He joined the firm in 1982, became a
Director in 1988, Managing Director in 1991, a member of the Board of Directors
in 1993, President in 1994 and Senior Managing Director and Chief Investment
Officer in 1996. Mr. Laplaige is also a manager of the Strategic Value, Value,
Convertible and Equity Income Funds.
MAUREEN MCFARLAND -- Ms. McFarland has managed the Global High Yield Fund since
inception. Ms. McFarland is an Associate Director at MacKay-Shields. She joined
MacKay-Shields in 1997 as Currency Overlay Manager in the Global Division. Prior
to joining the company, Ms. McFarland was employed at Brown Brothers Harriman &
Co., where she managed global fixed income portfolios.
EDWARD MUNSHOWER -- Mr. Munshower has managed the Government and Strategic
Income Funds since inception. Mr. Munshower is a Director of MacKay-Shields. He
joined MacKay-Shields as a fixed income investment specialist in 1985 after
having been an investment analyst for New York Life Insurance Company. Mr.
Munshower has over 14 years of experience in investment management and research.
JOSEPH PORTERA -- Mr. Portera has managed the Strategic Income and Global High
Yield Funds since inception. Mr. Portera is a Director of MacKay-Shields
specializing in international bonds. He returned to MacKay-Shields in December
1996 after working at Fiduciary Trust Company International as a portfolio
manager in international bonds. Mr. Portera joined MacKay-Shields in 1991 and
was portfolio manager of the International Bond Fund from its inception to
August 1995 and currently manages the Fund. Mr. Portera is also manager of the
International Equity Fund.
STEVEN TANANBAUM -- Mr. Tananbaum has managed the High Yield Corporate Bond Fund
since 1989 and the Strategic Income Fund since inception. Mr. Tananbaum, a
Managing Director of MacKay-Shields, joined MacKay-Shields in 1989. Mr.
Tananbaum is also a manager of the Strategic Value Fund.
JAMES AGOSTISI -- Mr. Agostisi has managed the Growth Opportunities Fund since
inception. Mr. Agostisi is a Director--Portfolio Management of Madison Square
Advisors and of New York Life Insurance Company. He has 14 years of investment
experience at New York Life and has been a Director--Portfolio Management of
Madison Square Advisors since its establishment.
RUDOLPH C. CARRYL -- Mr. Carryl has managed the Capital Appreciation and Total
Return Funds since 1992, and the Small Cap Growth Fund since inception. Mr.
Carryl is a Managing Director of MacKay-Shields. He joined MacKay-Shields as a
Director in 1992 with twelve years of investment management and research
experience. Mr. Carryl was Research Director and Senior Portfolio Manager at
Value Line, Inc. from 1978 to 1992.
TIMOTHY DALTON, JR. -- Mr. Dalton has managed the Small Cap Value Fund since
inception. Mr. Dalton is Chief Executive Officer and Chief Investment Officer of
Dalton, Greiner, Hartman, Maher & Co. He has served as CEO and CIO since he
founded the investment management business in 1982.
KENNETH GREINER -- Mr. Greiner has managed the Small Cap Value Fund since
inception. Mr. Greiner, who joined the firm in 1983, is President of Dalton,
Greiner, Hartman, Maher & Co. Mr. Greiner has served as a portfolio manager and
research analyst since 1983.
STEPHEN B. KILLIAN -- Mr. Killian has managed the Equity Index Fund since
[ ]. Mr. Killian, who joined Monitor Capital in 1997, is a Vice President
with portfolio management responsibility for international equity funds, active
quantitative equity portfolios and development of quantitative strategies. Prior
to joining Monitor, Mr. Killian was a Partner and Senior Portfolio Manager at
Rhumbline Advisers from 1992 to 1997.
JEFFREY A. KIGNER -- Mr. Kigner has managed the Research Value Fund since
inception. Mr. Kigner is Co-Chairman and Chief Investment Officer of John A.
Levin & Co. Mr. Kigner has been a securities analyst and portfolio manager of
John A. Levin & Co. (and its predecessor) since 1984. He has been a Director of
Baker, Fentress & Company since June 1996.
64
<PAGE> 68
JOHN A. LEVIN -- Mr. Levin has managed the Research Value Fund since inception.
Mr. Levin has been Chairman and Chief Executive Officer of John A. Levin & Co.
(and President of its predecessor) since 1982. He has been Director, President
and Chief Executive Officer of Baker, Fentress & Company since June 1996.
JAMES MEHLING -- Mr. Mehling has managed the Equity Index Fund since 1991. Mr.
Mehling joined Monitor Capital Advisors in 1991 after working as director of
risk management in the investment department of New York Life Insurance Company.
Mr. Mehling is currently Chief Investment Officer for Monitor. He began his
career in financial services with Merrill Lynch in 1976 and was with County
NatWest Government Securities from 1987 to 1989.
RICHARD A. ROSEN -- Mr. Rosen has managed the Value Fund since January, 1999.
Mr. Rosen is a Director in the Equity Division of MacKay-Shields. Prior to
joining MacKay-Shields in January, 1999, he was a Managing Director responsible
for equity securities at Prudential Investments from August 1991 to January
1999.
PATRICIA S. ROSSI -- Ms. Rossi has managed the Growth Opportunities Fund since
inception. Ms. Rossi is Managing Director--Portfolio Management of Madison
Square Advisors and of New York Life Insurance Company. She joined New York Life
in 1995 as Head of Public Equities and has been a Managing Director--Portfolio
Management of Madison Square Advisors since its establishment. Ms. Rossi has
over 20 years of investment management and research experience. Prior to joining
New York Life, Ms. Rossi was a portfolio manager for the United Church of
Christ--Pension Boards.
MICHAEL SHERIDAN -- Mr. Sheridan has managed the Equity Income Fund since
inception. Mr. Sheridan joined MacKay-Shields in 1996 and is an Associate
Director. Previously, he was an equity analyst at Arnhold & S. Bleichroder
Capital.
G. TODD SILVA -- Mr. Silva has managed the Research Value Fund since inception.
Mr. Silva has been Senior Portfolio Manager at John A. Levin & Co. since
February 1998. Prior to joining John A. Levin & Co., Mr. Silva was a portfolio
manager at Jennison Associates LLC and at Scudder, Stevens & Clark, Inc. and a
securities analyst at Putnam Investments.
EDMUND C. SPELMAN -- Mr. Spelman has managed the Capital Appreciation and Total
Return Funds since 1991, and the Small Cap Growth Fund since inception. Mr.
Spelman is a Managing Director at MacKay-Shields and specializes in equity
securities. He joined MacKay-Shields in 1991 after working as a securities
analyst at Oppenheimer & Co., Inc. from 1983 to 1990.
HOWARD F. WARD -- Mr. Ward has managed the Blue Chip Growth Fund since
inception. Mr. Ward is a portfolio manager with Gabelli Asset Management
Company. Prior to joining GAMCO in 1995, Mr. Ward was Managing Director and
Director of the Quality Growth Equity Management Group of Scudder, Stevens and
Clark, Inc., with which he had been associated since 1982 and where he served as
lead portfolio manager for several of its registered investment companies.
THOMAS WYNN -- Mr. Wynn has managed the Convertible Fund since 1977. Mr. Wynn
joined MacKay-Shields in 1995 as a research analyst. He was previously a
portfolio manager at Fiduciary Trust for nine years and has over twelve years
experience in investment management and research.
65
<PAGE> 69
Prior performance does not represent historical performance of a Fund, nor is it
an indication or guarantee of future performance of a Fund, which may be higher
or lower than the performance shown below. Performance data for the Gabelli
Growth Fund and the MainStay VP Growth Equity Portfolio was calculated in
compliance with the method of performance calculation prescribed by the SEC for
mutual funds. Except as described below, performance data for each composite has
been prepared in compliance with the Performance Presentation Standards of the
Association for Investment Management and Research (AIMR-PPS(TM)).(1)(2)(3) AIMR
did not prepare or review this data. All performance information has been
provided by the Sub-Advisers and has not been verified or audited by the Manager
or the Funds. For the periods prior to January 1, 1993, performance data for the
John A. Levin & Co. Large Cap Value Composite was not calculated in compliance
with AIMR standards because size-weighted composite returns were calculated
using end-of-period market values. In addition, information with regard to
dispersion of account performance is not provided for such periods. Accounts in
the composites were not subject to the same types of expenses as the Funds or
(except for one account in the John A. Levin & Co. Large Cap Value Composite)
the requirements of the Investment Company Act of 1940 or the Internal Revenue
Code, the limitations of which might have adversely affected performance
results. Prior performance reflects actual expenses incurred by the comparison
fund and/or accounts in the composite.(2) Estimated Fund expenses are higher,
and therefore, if Fund expenses had been applied, performance of the comparison
fund and/or accounts in the composite would have been lower.
1. MacKay-Shields (and its small cap growth equity composite) has received a
Level 1 verification from an independent party for the period January 1, 1988
through the most recent quarter. An opinion is available on request, as is a
complete list and description of the firm's composites. No leverage has been
used in this composite. The asset mix of small cap growth equity accounts may
not be precisely comparable to the Russell 2000 Index. Net returns are
calculated quarterly, based on an assumed account size of $50 million which,
based on MacKay's-Shield's standard fee schedule would be subject to
composite assets (in millions) and percentage of firm assets were as follows
at year ends 1988-1998; [To be provided].
2. With respect to the John A. Levin & Co. Large Cap Value Composite, for the
period through June 30, 1996, performance is that of the company's
predecessor. For the period from inception through 1989, the results shown
reflect the deduction of a 1% investment management fee payable quarterly at
the rate of .25% of ending market value. This is the maximum investment
management fee charged by John A. Levin & Co. Individual account fees may
have varied. For the periods from January 1, 1990 through December 31, 1998,
returns reflect the deduction of the actual dollar-weighted fee rate paid by
all accounts in the composite. The dollar-weighted fee rate has been
calculated by dividing the quarterly investment management fees paid by the
accounts in the composite by the total composite asset value. This
dollar-weighted fee rate includes the performance fees paid by certain
accounts; inclusion of the performance-based fees does not materially affect
the dollar-weighted fee rate. Annual net returns, the number of portfolios
included in the composite, composite assets (in millions), and percentage of
firm assets included in the composite were as follows at year-ends 1982-1998:
[To be provided] For the years 1990-1998, the actual dollar-weighted fee
rates used to calculate the composite were as follows: [To be provided] For
the years 1993-1998, the standard deviation of composite accounts were as
follows: [To be provided] A complete list of composites is available upon
request.
3. With respect to DGHM's Small Cap Value Composite, performance is net of
actual management fees paid which were 1% per annum. The composite consists
of fewer than five accounts since its inception in July 1994. A complete list
of composites is available upon request. Annual net returns, composite assets
(in millions), percentage of firm assets and the standard deviation of
composite accounts were as follows: [To be provided]
GABELLI FUNDS, INC. AND GAMCO -- PRIOR PERFORMANCE
Set forth below is the performance record for another mutual fund which is
managed by Gabelli Funds, Inc., an affiliate of GAMCO, which has investment
objectives and policies that are substantially similar though not identical to
those of the Blue Chip Growth Fund. In addition, Gabelli Funds, Inc. and GAMCO
intend that the Blue Chip Growth Fund and Gabelli Growth Fund will be managed by
the same personnel and will have substantially similar investment strategies,
techniques, and characteristics. The investment performance of Gabelli Growth
Fund is provided merely to indicate the experience of Gabelli personnel in
managing a similar portfolio.
These figures reflect reinvestment of dividends and distributions and are after
deduction of all fund fees and expenses of the Gabelli Growth Fund. Included for
comparison purposes are performance figures of the S&P 500 Index. It has been
adjusted to reflect reinvestment of dividends.
<TABLE>
<CAPTION>
AS OF 12/31/98
--------------------------------------------
ONE YEAR THREE YEAR FIVE YEAR TEN YEAR
INCEPTION TOTAL TOTAL TOTAL TOTAL
DATE RETURN RETURN RETURN RETURN
<S> <C> <C> <C> <C> <C>
Gabelli Growth Fund 4/10/87 % % % %
S&P 500 Index % % % %
</TABLE>
JOHN A. LEVIN & CO. -- PRIOR PERFORMANCE
The figures below show the pasts performance of John A. Levin & Co. in managing
accounts with investment objectives, policies, techniques and restrictions
substantially similar though not identical to those of the Research Value Fund.
The chart below shows average annual returns for a composite of the actual
performance of all large cap value accounts managed by John A. Levin & Co. since
October 31, 1982, except for accounts with assets under $1 million and accounts
managed under a broker-sponsored wrap-fee program.(1)
The figures reflect reinvestment of dividends and are net of expenses. Included
for comparison purposes are performance figures of the S&P 500 Index and the
Lipper
66
<PAGE> 70
Growth & Income Index. They have been adjusted to reflect reinvestment of
dividends.
<TABLE>
<CAPTION>
AS OF 12/31/98
-----------------------------------------------------------
ONE YEAR THREE YEAR FIVE YEAR TEN YEAR SINCE
TOTAL TOTAL TOTAL TOTAL INCEPTION
RETURN RETURN RETURN RETURN TOTAL RETURN
<S> <C> <C> <C> <C> <C>
John A. Levin & Co.
Large Cap Value Composite % % % % %
S&P 500 Index % % % % %
Lipper Growth & Income Index % % % % %
</TABLE>
* From October 13, 1982
** From October 31, 1982
DGHM -- PRIOR PERFORMANCE
The figures below show the past performance of DGHM in managing accounts with
investment objectives, policies, techniques and restrictions substantially
similar though not identical to those of the Small Cap Value Fund. The chart
below shows average annual returns for a composite of the actual performance of
all small cap value accounts managed by DGHM since July 1, 1994.
The figures reflect reinvestment of dividends and are net of all fees. Included
for comparison purposes are performance figures of the Russell 2000 Index. It
has been adjusted to reflect reinvestment of dividends.
<TABLE>
<CAPTION>
AS OF 12/31/98
---------------------------------------
ONE YEAR THREE YEAR SINCE INCEPTION
TOTAL TOTAL TOTAL
RETURN RETURN RETURN
<S> <C> <C> <C>
Dalton, Greiner, Hartman, Maher & Co.
Small Cap Value Composite 40.0% 27.4% 23.1%
Russell 2000 Index 22.4% 22.3% 20.5%
</TABLE>
1. With respect to the John A. Levin & Co. Large Cap Value Composite, for the
period through June 30, 1996, performance is that of the company's
predecessor. For the period from inception through 1989, the results shown
reflect the deductions of a 1% investment management fee payable quarterly at
the rate of .25% of ending market value. This is the maximum investment
management fee charged by John A. Levin & Co. Individual account fees may
have varied. For the periods from January 1, 1990 through December 31, 1998,
returns reflect the deduction of the actual dollar-weighted fee rate paid by
all accounts in the composite. The dollar-weighted fee rate has been
calculated by dividing the quarterly investment management fees paid by the
accounts in the composite by the total composite asset value. This
dollar-weighted fee rate includes the performance fee paid by certain
accounts; inclusion of the performance-based fees does not materially affect
the dollar-weighted fee rate. Annual net returns, the number of portfolios
included in the composite, composite assets (in millions), and percentage of
firm assets included in the composite were as follows at year-ends 1982-1998:
[To be provided]. For the years 1990-1998, the actual dollar-weighted fee
rates used to calculate the composite were as follows: [To be provided] For
the years 1993-1998, the standard deviation of composite accounts were as
follows: [To be provided] A complete list of composites is available upon
request.
NEW YORK LIFE AND MSA -- PRIOR PERFORMANCE
Set forth below is the performance of a mutual fund which is managed by New York
Life, the parent of MSA, which has investment objectives and policies that are
substantially similar though not identical to those of the Growth Opportunities
Fund. In addition, New York Life and MSA intend that the Growth Opportunities
Fund and MainStay VP Growth Equity Portfolio will be managed by the same
personnel and will have substantially similar investment strategies, techniques,
and characteristics. The investment performance of MainStay VP Growth Equity
Portfolio is provided merely to indicate the experience of MSA personnel in
managing a similar portfolio.
These figures reflect reinvestment of dividends and distributions and are after
deduction of all fund fees and expenses of the MainStay VP Growth Equity
Portfolio. Included for comparison purposes are performance figures of the S&P
500 Index. It has been adjusted to reflect reinvestment of dividends.
<TABLE>
<CAPTION>
AS OF 12/31/98
--------------------------------------------
ONE YEAR THREE YEAR FIVE YEAR TEN YEAR
TOTAL TOTAL TOTAL TOTAL
RETURN RETURN RETURN RETURN
<S> <C> <C> <C> <C>
MainStay VP Growth Equity Portfolio % % % %
S&P 500 Index % % % %
</TABLE>
67
<PAGE> 71
MACKAY-SHIELDS -- PRIOR PERFORMANCE
The figures below show the past performance of MacKay-Shields in managing
accounts with investment objectives, policies, techniques and restrictions
substantially similar though not identical to those of the Small Cap Growth
Fund. The chart below shows the market weighted average of the time weighted
returns for a composite of the actual performance of all small cap growth
accounts managed by MacKay-Shields since January 1, 1985.
The figures reflect reinvestment of income and dividends and are net of
expenses. Included for comparison purposes are performance figures of the
Russell 2000 Growth Index, which also reflects reinvestment of income and
dividends.
<TABLE>
<CAPTION>
AS OF 12/31/98
--------------------------------------------
ONE YEAR THREE YEAR FIVE YEAR TEN YEAR
TOTAL TOTAL TOTAL TOTAL
RETURN RETURN RETURN RETURN
<S> <C> <C> <C> <C>
MacKay-Shields
Small Cap Growth Composite % % % %
Russell 2000 Growth Index % % % %
</TABLE>
68
<PAGE> 72
Financial Highlights
The financial highlights tables are intended to help you understand the Funds'
financial performance for the past 5 years or, if shorter, the period of the
Funds' operations. Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned or lost on an investment in the Funds (assuming reinvestment
of all dividends and distributions). This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Funds' financial
statements, are included in the annual reports, which are available upon
request.
MAINSTAY GOVERNMENT FUND(++)
<TABLE>
<CAPTION>
CLASS B
-------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B SEPTEMBER 1 YEAR
------- -------- ------- -------- ------- -------- THROUGH ENDED
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, AUGUST 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 1994(A) 1994
------------------ ------------------ ------------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period............................... $ 8.06 $ 8.04 $ 8.41 $ 8.41 $ 7.76 $ 7.76 $ 8.04 $ 8.77
------- -------- ------- -------- ------- -------- ---------- ----------
Net investment income.................. 0.50 0.45 0.50 0.46 0.58 0.54 0.19 0.57
Net realized and unrealized gain (loss)
on investments....................... 0.21 0.21 (0.35) (0.37) 0.65 0.65 (0.29) (0.71)
------- -------- ------- -------- ------- -------- ---------- ----------
Total from investment operations....... 0.71 0.66 0.15 0.09 1.23 1.19 (0.10) (0.14)
------- -------- ------- -------- ------- -------- ---------- ----------
Less dividends and distributions:
From net investment income............. (0.50) (0.45) (0.50) (0.46) (0.58) (0.54) (0.18) (0.57)
In excess of net investment income..... -- -- -- -- (0.00)(c) (0.00)(c) -- (0.01)
Return of capital...................... -- -- -- -- -- -- -- (0.01)
------- -------- ------- -------- ------- -------- ---------- ----------
Total dividends and distributions...... (0.50) (0.45) (0.50) (0.46) (0.58) (0.54) (0.18) (0.59)
------- -------- ------- -------- ------- -------- ---------- ----------
Net asset value at end of period....... $ 8.27 $ 8.25 $ 8.06 $ 8.04 $ 8.41 $ 8.41 $ 7.76 $ 8.04
======= ======== ======= ======== ======= ======== ========== ==========
Total investment return(b)............. 9.12% 8.54% 1.97% 1.25% 16.38% 15.69% (1.24%) (1.63%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income................ 6.23% 5.67% 6.3% 5.7% 7.3% 6.7% 7.1%+ 7.1%
Expenses............................. 1.09% 1.65% 1.0% 1.6% 1.0% 1.7% 1.7%+ 1.7%
Portfolio turnover rate................ 338% 338% 307% 307% 540% 540% 143% 491%
Net assets at end of period (in
000's)............................... $17,114 $636,491 $16,413 $782,970 $12,784 $990,184 $1,024,492 $1,119,586
</TABLE>
- --------
<TABLE>
<C> <S>
+ Annualized.
(++) Formerly Government Plus Fund.
(a) The Fund changed its fiscal year end from August 31 to
December 31.
(b) Total return is calculated exclusive of sales charges and is
not annualized.
(c) Less than one cent per share.
</TABLE>
MAINSTAY HIGH YIELD CORPORATE BOND FUND
<TABLE>
<CAPTION>
CLASS B
------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B SEPTEMBER 1
-------- ---------- -------- ---------- ------- ---------- THROUGH
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 1994(A)
--------------------- --------------------- -------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period...... $ 8.27 $ 8.26 $ 7.92 $ 7.92 $ 7.44 $ 7.44 $ 7.70
-------- ---------- -------- ---------- ------- ---------- ----------
Net investment income....................... 0.74 0.69 0.72 0.67 0.84 0.81 0.23
Net realized and unrealized gain (loss) on
investments............................... 0.23 0.23 0.52 0.52 0.61 0.61 (0.27)
Net realized and unrealized loss on foreign
currency transactions..................... (0.00)(c) (0.00)(c) (0.00)(c) (0.00)(c) (0.00)(c) (0.00)(c)
-------- ---------- -------- ---------- ------- ---------- ----------
Total from investment operations............ 0.97 0.92 1.24 1.19 1.45 1.42 (0.04)
-------- ---------- -------- ---------- ------- ---------- ----------
Less dividends and distributions:
From net investment income.................. (0.74) (0.69) (0.71) (0.67) (0.84) (0.81) (0.22)
In excess of net investment income.......... -- -- -- -- (0.01) (0.01) --
From net realized gain on investments....... (0.34) (0.34) (0.18) (0.18) (0.10) (0.10) --
In excess of net realized gain on
investments............................... -- -- -- -- (0.02) (0.02) --
-------- ---------- -------- ---------- ------- ---------- ----------
Total dividends and distributions........... (1.08) (1.03) (0.89) (0.85) (0.97) (0.94) (0.22)
-------- ---------- -------- ---------- ------- ---------- ----------
Net asset value at end of period............ $ 8.16 $ 8.15 $ 8.27 $ 8.26 $ 7.92 $ 7.92 $ 7.44
======== ========== ======== ========== ======= ========== ==========
Total investment return(b).................. 12.20% 11.55% 16.33% 15.58% 20.28% 19.71% (0.48%)
Ratios (to average net assets)/Supplemental
Data:
Net investment income..................... 8.79% 8.18% 9.0% 8.4% 10.2% 9.5% 9.1%+
Expenses.................................. 1.01% 1.62% 1.0% 1.6% 1.0% 1.6% 1.6%+
Portfolio turnover rate..................... 128% 128% 118% 118% 137% 137% 45%
Average commission rate paid................ $ 0.0600 $ 0.0600 $ 0.0630 $ 0.0630 (d) (d) (d)
Net assets at end of period (in 000's)...... $238,841 $3,380,439 $116,805 $2,441,180 $42,850 $1,601,238 $1,128,913
</TABLE>
- --------
<TABLE>
<C> <S>
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to
December 31.
(b) Total return is calculated exclusive of sales charges and is
not annualized.
(c) Less than one cent per share.
(d) Disclosure of amount required for fiscal years beginning on
or after September 1, 1995.
</TABLE>
69
<PAGE> 73
MAINSTAY INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
CLASS B
---------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B SEPTEMBER 13(A)
------- ------- ------- ------- ------- ------- THROUGH
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 1994
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period.............. $ 10.95 $ 10.98 $ 10.43 $ 10.45 $ 9.90 $ 9.90 $ 10.00
------- ------- ------- ------- ------- ------- -------
Net investment income............................... 0.80 0.74 0.72 0.64 1.15 1.06 0.12
Net realized and unrealized gain (loss) on
investments....................................... (0.94) (0.96) 0.27 0.27 0.59 0.61 (0.08)
Net realized and unrealized gain (loss) on foreign
currency transactions............................. 0.33 0.34 0.41 0.42 0.07 0.07 (0.02)
------- ------- ------- ------- ------- ------- -------
Total from investment operations.................... 0.19 0.12 1.40 1.33 1.81 1.74 0.02
------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income and net realized gain on
foreign currency transactions..................... (0.76) (0.70) (0.73) (0.65) (0.61) (0.56) (0.12)
From net realized gain on investments............... (0.28) (0.28) (0.15) (0.15) (0.28) (0.28) --
In excess of net realized gain on investments and
foreign currency transactions..................... -- -- -- -- (0.39) (0.35) --
------- ------- ------- ------- ------- ------- -------
Total dividends and distributions................... (1.04) (0.98) (0.88) (0.80) (1.28) (1.19) (0.12)
------- ------- ------- ------- ------- ------- -------
Net asset value at end of period.................... $ 10.10 $ 10.12 $ 10.95 $ 10.98 $ 10.43 $ 10.45 $ 9.90
======= ======= ======= ======= ======= ======= =======
Total investment return(b).......................... 1.83% 1.15% 13.90% 13.13% 18.68% 17.96% 0.20%
Ratios (to average net assets)/Supplemental Data:
Net investment income............................. 5.35% 4.69% 5.4% 4.8% 5.6% 4.9% 4.8%+
Net Expenses...................................... 1.56% 2.22% 1.5% 2.1% 1.5% 2.2% 2.8%+
Expenses (before waiver).......................... 1.86% 2.52% 1.8% 2.4% 1.8% 2.5% 3.1%+
Portfolio turnover rate............................. 179% 179% 59% 59% 103% 103% 4%
Net assets at end of period (in 000's).............. $12,263 $20,870 $11,965 $19,020 $11,494 $13,212 $17,155
</TABLE>
- --------
<TABLE>
<C> <S>
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is
not annualized.
</TABLE>
MAINSTAY STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------- --------
FEBRUARY 28, 1997*
THROUGH
DECEMBER 31, 1997
-------------------
<S> <C> <C>
Net asset value at beginning of period...................... $ 10.00 $ 10.00
------- -------
Net investment income....................................... 0.54 0.48
Net realized and unrealized gain on investments............. 0.07 0.07
Net realized and unrealized gain on foreign currency
transactions.............................................. 0.05 0.05
------- -------
Total from investment operations............................ 0.66 0.60
------- -------
Less dividends and distributions:
From net investment income.................................. (0.54) (0.48)
From net realized gain on investments....................... (0.21) (0.21)
------- -------
Total dividends and distributions........................... (0.75) (0.69)
------- -------
Net asset value at end of period............................ $ 9.91 $ 9.91
======= =======
Total investment return(a).................................. 6.62% 6.02%
Ratios (to average net assets)/Supplemental Data:
Net investment income..................................... 6.46%+ 5.71%+
Net expenses.............................................. 1.15%+ 1.90%+
Expenses (before reimbursement)........................... 1.49%+ 2.24%+
Portfolio turnover rate..................................... 323% 323%
Average commission rate paid................................ $0.0520 $0.0520
Net assets at end of period (in 000's)...................... $18,922 $43,872
</TABLE>
- --------
<TABLE>
<C> <S>
* Commencement of operations.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
</TABLE>
70
<PAGE> 74
MAINSTAY MONEY MARKET FUND
<TABLE>
<CAPTION>
CLASS B
-------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B SEPTEMBER 1 YEAR
------- -------- ------- -------- ------- -------- THROUGH ENDED
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, AUGUST 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 1994(A) 1994
------------------ ------------------ ------------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- ------- -------- ------- -------- -------- --------
Net investment income.................. 0.05 0.05 0.05 0.05 0.05 0.05 0.02 0.03
------- -------- ------- -------- ------- -------- -------- --------
Less dividends from net investment
income............................... (0.05) (0.05) (0.05) (0.05) (0.05) (0.05) (0.02) (0.03)
------- -------- ------- -------- ------- -------- -------- --------
Net asset value at end of period....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======= ======== ======= ======== ======== ========
Total investment return(b)............. 5.08% 5.08% 4.91% 4.91% 5.51% 5.51% 1.54% 3.08%
Ratios (to average net assets)/
Supplemental Data:
Net investment income................ 4.97% 4.97% 4.8% 4.8% 5.4% 5.4% 4.6%+ 3.1%
Net expenses......................... 0.70% 0.70% 0.7% 0.7% 0.7% 0.7% 0.7%+ 0.7%
Expenses (before waiver and
reimbursement)..................... 0.95% 0.95% 1.0% 1.0% 0.9% 0.9% 0.9%+ 1.0%
Net assets at end of period (in
000's)............................... $80,925 $336,622 $53,890 $317,483 $34,880 $279,843 $221,912 $192,477
</TABLE>
- --------
<TABLE>
<C> <S>
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to
December 31.
(b) Total return is not annualized.
</TABLE>
MAINSTAY CALIFORNIA TAX FREE FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B SEPTEMBER 1 YEAR
------- ------- ------- ------- ------- ------- THROUGH ENDED
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, AUGUST 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 1994(A) 1994
----------------- ----------------- ----------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period.... $ 9.78 $ 9.75 $ 9.95 $ 9.91 $ 9.10 $ 9.10 $ 9.57 $ 10.38
------- ------ ------- ------ ------- ------ ------- -------
Net investment income..................... 0.48 0.45 0.49 0.45 0.50 0.52 0.17 0.53
Net realized and unrealized gain (loss) on
investments............................. 0.27 0.27 (0.16) (0.16) 0.85 0.81 (0.47) (0.51)
------- ------ ------- ------ ------- ------ ------- -------
Total from investment operations.......... 0.75 0.72 0.33 0.29 1.35 1.33 (0.30) 0.02
------- ------ ------- ------ ------- ------ ------- -------
Less dividends and distributions:
From net investment income................ (0.48) (0.45) (0.50) (0.45) (0.50) (0.52) (0.17) (0.52)
From net realized gain on investments..... (0.12) (0.12) -- -- -- -- -- (0.31)
------- ------ ------- ------ ------- ------ ------- -------
Total dividends and distributions......... (0.60) (0.57) (0.50) (0.45) (0.50) (0.52) (0.17) (0.83)
------- ------ ------- ------ ------- ------ ------- -------
Net asset value at end of period.......... $ 9.93 $ 9.90 $ 9.78 $ 9.75 $ 9.95 $ 9.91 $ 9.10 $ 9.57
======= ====== ======= ====== ======= ====== ======= =======
Total investment return(c)................ 7.90% 7.63% 3.44% 3.10% 15.18% 14.91% (3.11%) 0.12%
Ratios (to average net
assets)/Supplemental Data:
Net investment income................... 4.88% 4.63% 5.0% 4.7% 5.3% 5.1% 5.5%+ 5.4%
Net expenses............................ 1.24% 1.49% 1.24% 1.49% 1.24% 1.49% 0.99%+ 0.99%
Expenses (before reimbursement)......... 1.26% 1.51% 1.3% 1.6% 1.4% 1.7% 1.2%+ 1.1%
Portfolio turnover rate................... 108% 108% 79% 79% 107% 107% 24% 96%
Net assets at end of period (in 000's).... $18,199 $7,288 $18,098 $5,089 $19,825 $1,963 $16,667 $17,356
</TABLE>
- --------
<TABLE>
<C> <S>
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to
December 31.
(b) Commencement of operations.
(c) Total return is calculated exclusive of sales charges and is
not annualized.
</TABLE>
71
<PAGE> 75
MAINSTAY NEW YORK TAX FREE FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B SEPTEMBER 1 YEAR
------- ------- ------- ------- ------- ------- THROUGH ENDED
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, AUGUST 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 1994(A) 1994
----------------- ----------------- ----------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period.... $ 9.91 $ 9.84 $ 10.12 $10.02 $ 9.20 $ 9.20 $ 9.58 $ 10.43
------- ------ ------- ------ ------- ------ ------- -------
Net investment income..................... 0.49 0.45 0.50 0.45 0.52 0.59 0.19 0.56
Net realized and unrealized gain (loss) on
investments............................. 0.32 0.33 (0.21) (0.18) 0.91 0.82 (0.39) (0.59)
------- ------ ------- ------ ------- ------ ------- -------
Total from investment operations.......... 0.81 0.78 0.29 0.27 1.43 1.41 (0.20) (0.03)
------- ------ ------- ------ ------- ------ ------- -------
Less dividends and distributions:
From net investment income................ (0.49) (0.45) (0.50) (0.45) (0.51) (0.59) (0.18) (0.57)
From net realized gain on investments..... (0.14) (0.14) -- -- -- -- -- (0.25)
------- ------ ------- ------ ------- ------ ------- -------
Total dividends and distributions......... (0.63) (0.59) (0.50) (0.45) (0.51) (0.59) (0.18) (0.82)
------- ------ ------- ------ ------- ------ ------- -------
Net asset value at end of period.......... $ 10.09 $10.03 $ 9.91 $ 9.84 $ 10.12 $10.02 $ 9.20 $ 9.58
======= ====== ======= ====== ======= ====== ======= =======
Total investment return(c)................ 8.39% 8.14% 3.06% 2.86% 15.97% 15.67% (2.11%) (0.35%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income................... 4.88% 4.63% 5.0% 4.7% 5.4% 5.1% 6.1%+ 5.7%
Net expenses............................ 1.24% 1.49% 1.24% 1.49% 1.24% 1.49% 0.99%+ 0.99%
Expenses (before reimbursement)......... 1.41% 1.66% 1.4% 1.6% 1.4% 1.6% 1.2%+ 1.1%
Portfolio turnover rate................... 212% 212% 114% 114% 114% 114% 39% 169%
Net assets at end of period (in 000's).... $13,814 $5,585 $15,572 $4,100 $18,248 $1,588 $17,106 $17,862
</TABLE>
- --------
<TABLE>
<C> <S>
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to
December 31.
(b) Commencement of operations.
(c) Total return is calculated exclusive of sales charges and is
not annualized.
</TABLE>
MAINSTAY TAX FREE BOND FUND
<TABLE>
<CAPTION>
CLASS B
-------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B SEPTEMBER 1 YEAR
------- -------- ------- -------- ------- -------- THROUGH ENDED
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, AUGUST 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 1994(A) 1994
------------------ ------------------ ------------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period............................... $ 9.84 $ 9.84 $ 10.02 $ 10.03 $ 9.20 $ 9.20 $ 9.71 $ 10.39
------- -------- ------- -------- ------ -------- -------- --------
Net investment income.................. 0.51 0.49 0.54 0.51 0.52 0.51 0.17 0.51
Net realized and unrealized gain (loss)
on investments....................... 0.35 0.35 (0.19) (0.19) 0.83 0.83 (0.51) (0.58)
------- -------- ------- -------- ------ -------- -------- --------
Total from investment operations....... 0.86 0.84 0.35 0.32 1.35 1.34 (0.34) (0.07)
------- -------- ------- -------- ------ -------- -------- --------
Less dividends and distributions:
From net investment income............. (0.51) (0.49) (0.53) (0.51) (0.53) (0.51) (0.17) (0.53)
From net realized gain on
investments.......................... -- -- -- -- -- -- -- (0.08)
------- -------- ------- -------- ------ -------- -------- --------
Total dividends and distributions...... (0.51) (0.49) (0.53) (0.51) (0.53) (0.51) (0.17) (0.61)
------- -------- ------- -------- ------ -------- -------- --------
Net asset value at end of period....... $ 10.19 $ 10.19 $ 9.84 $ 9.84 $10.02 $ 10.03 $ 9.20 $ 9.71
======= ======== ======= ======== ====== ======== ======== ========
Total investment return(b)............. 9.02% 8.80% 3.63% 3.33% 15.00% 14.86% (3.53%) (0.69%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income................ 5.14% 4.93% 5.4% 5.2% 5.5% 5.2% 5.6%+ 5.4%
Expenses............................. 1.01% 1.22% 1.0% 1.2% 1.0% 1.2% 1.2%+ 1.2%
Portfolio turnover rate................ 119% 119% 95% 95% 110% 110% 37% 92%
Net assets at end of period (in
000's)............................... $13,017 $482,109 $16,486 $496,231 $9,752 $543,314 $513,781 $552,156
</TABLE>
- --------
<TABLE>
<C> <S>
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to
December 31.
(b) Total return is calculated exclusive of sales charges and is
not annualized.
</TABLE>
72
<PAGE> 76
APPENDIX A
TAXABLE EQUIVALENT YIELD TABLE(*)(+)
<TABLE>
<CAPTION>
IF YOUR
FEDERAL
MARGINAL A TAX-FREE YIELD OF
INCOME ------------------------------------------------
TAX 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
RATE IS ---- ---- ---- ---- ---- ----- -----
WOULD EQUAL A TAXABLE YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C>
15.00% ... 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24%
28.00% ... 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72%
31.00% ... 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14%
36.00% ... 6.25% 7.03% 7.81% 8.59% 9.38% 10.16% 10.94%
39.60% ... 6.62% 7.45% 8.28% 9.11% 9.93% 10.76% 11.59%
- ------------------------------------------------------------
</TABLE>
* This table reflects application of the regular federal income tax only; other
taxes may be applicable with respect to a particular shareholder. Such taxes
could change the information shown. Tax rates are subject to change. Investors
in the California and New York Tax Free Funds should in particular note that
the chart does not reflect any state and local taxes that may be deductible in
computing federal income tax liability.
+ This table is for illustrative purposes only; investors should consult their
tax advisers with respect to the tax implications of an investment in a Fund
that invests primarily in securities the interest on which is exempt from
regular federal income tax.
73
<PAGE> 77
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND IN THE RELATED STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST OR THE DISTRIBUTOR. THIS PROSPECTUS AND THE RELATED STATEMENT OF
ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFER BY THE TRUST OR BY THE
DISTRIBUTOR TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER IN SUCH JURISDICTION.
MAINSTAY.LOGO
NYLIFE DISTRIBUTORS INC.
300 Interpace Parkway
Building A
Parsippany, New Jersey 07054
Distributor of The MainStay Funds
NYLIFE Distributors Inc. is an indirect wholly owned
subsidiary of New York Life Insurance Company.
NYLIFE.LOGO
RECYCLE.LOGO
MORE INFORMATION ABOUT THE FUNDS IS AVAILABLE FREE UPON REQUEST:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Provides more details about the Funds. A current SAI is incorporated by
reference into the prospectus and has been filed with the SEC.
ANNUAL/SEMIANNUAL REPORTS
Provides additional information about the Funds' investments and include
discussions of market conditions and investment strategies that significantly
affected the Funds' performance during the last fiscal year.
TO OBTAIN INFORMATION:
Write to NYLIFE Distributors Inc., 300 Interpace Parkway, Building A,
Parsippany, N.J. 07054, call 1-800-MAINSTAY (1-800-624-6782) or visit our
website at mainstayfunds.com.
You can obtain information about the Funds (including the SAI) by visiting the
SEC's Public Reference Room in Washington, D.C. (phone 1-800-SEC-0330). You may
visit the SEC's website at sec.gov or you may send your written request and a
duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-6009.
THE MAINSTAY FUNDS
SEC File Number: 811-4550
[This prospectus is also available in Spanish. For a copy, please call
1-800-MAINSTAY (1-800-624-6782), option 3.]
<PAGE> 78
THE MAINSTAY FUNDS
- ------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
- ------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectuses of the Funds dated May 1, 1999, as
amended or supplemented from time to time, copies of which may be obtained
without charge by writing to NYLIFE Distributors Inc., (the "Distributor") 300
Interpace Parkway, Parsippany, NJ 07054 or by calling 1-800-MAINSTAY (1-
800-624-6782).
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Statement of Additional Information or in the related Prospectus, in connection
with the offers contained herein, and, if given or made, such other information
or representations must not be relied upon as having been authorized by The
MainStay Funds or the Distributor. This Statement of Additional Information and
the related Prospectuses do not constitute an offer by The MainStay Funds or by
the Distributor to sell or a solicitation of any offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction.
Shareholder inquiries should be made by writing directly to MainStay
Shareholder Services, Inc., P.O. Box 8401, Boston, Massachusetts 02266-8401, or
by calling 1-800-MAINSTAY. In addition, you can make inquiries through your
registered representative.
The financial statements of each of the Funds, except for the MAP Equity
Fund, which commenced operations on ________, 1999, including the Portfolio of
Investments as of December 31, 1998, the Statement of Assets and Liabilities as
of December 31, 1998, the Statement of Operations for the year ended December
31, 1998, the Statement of Changes in Net Assets for the years ended December
31, 1998 and 1997, the Notes to the Financial Statements and Reports of
Independent Accountants, all of which are included in the 1998 Annual Reports to
the Shareholders are hereby incorporated by reference into this Statement of
Additional Information.
<PAGE> 79
In addition, the financial statements of the MAP-Equity fund, including
the Portfolio of Investments as of December 31, 1998, the Statement of Assets
and Liabilities as of December 31, 1998, the Statement of Operations for the
year ended December 31, 1998, the Statement of Changes in Net Assets for the
years ended December 31, 1998 and 1997, the Notes to the Financial Statements
and the Reports of Independent Accountants, all of which are included in the
MAP-Equity Fund's 1998 Annual Report to the Shareholders are hereby incorporated
by reference into this Statement of Additional Information.
An audited financial statement for NYLIFE Inc. As of December 31, 1998,
is included in this Statement of Additional Information.
<PAGE> 80
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN
STATEMENT OF
ADDITIONAL
INFORMATION
-----------
<S> <C>
The MainStay Funds................................................................ 6
Additional Information About Certain Funds........................................ 6
Blue Chip Growth Fund................................................. 7
Convertible Fund...................................................... 7
Equity Index Fund..................................................... 8
Global High Yield Fund................................................ 8
Government Fund....................................................... 9
High Yield Corporate Bond Fund........................................ 9
International Bond Fund.............................................. 10
International Equity Fund............................................ 11
MAP Equity Fund...................................................... 12
Money Market Fund.................................................... 13
Research Value Fund.................................................. 16
Small Cap Value Fund................................................. 17
Strategic Income Fund................................................ 17
Strategic Value Fund................................................. 19
Tax Free Bond Fund................................................... 21
Total Return Fund.................................................... 22
The Equity Index Fund Guarantee...................................... 23
Risk Factors Affecting California Municipal Securities............... 27
Risk Factors Affecting New York Municipal Securities................. 39
Special Considerations Affecting Puerto Rico......................... 57
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS
.................................................................... 61
Repurchase Agreements................................................ 62
Lending of Portfolio Securities...................................... 64
Bank Obligations..................................................... 65
U.S. Government Securities........................................... 66
Debt Securities...................................................... 66
Convertible Securities............................................... 67
Arbitrage ......................................................... 68
Foreign Securities................................................... 68
Foreign Currency Transactions........................................ 70
Foreign Index-Linked Instruments..................................... 74
Brady Bonds ......................................................... 74
Municipal Securities................................................. 75
Industrial Development and Pollution Control Bonds................... 80
Variable Rate Demand Notes ("VRDNs")................................. 81
Floating and Variable Rate Securities................................ 81
Zero Coupon Bonds.................................................... 82
</TABLE>
<PAGE> 81
<TABLE>
<S> <C>
Standby Commitments -- Obligations with Puts Attached................ 82
When-Issued Securities............................................... 83
Mortgage-Related and Other Asset-Backed Securities................... 84
Short Sales Against the Box.......................................... 94
Options on Securities................................................ 95
Options on Foreign Currencies....................................... 101
Securities Index Options............................................ 104
Futures Transactions................................................ 105
Swap Agreements..................................................... 115
Loan Participation Interests........................................ 118
Risks Associated with Debt Securities............................... 120
Risks of Investing in High Yield Securities
("Junk Bonds")...................................................... 121
FUNDAMENTAL INVESTMENT RESTRICTIONS............................................. 122
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS......................................... 124
PORTFOLIO TURNOVER.............................................................. 130
TRUSTEES AND OFFICERS........................................................... 130
THE MANAGER, THE SUB-ADVISERS AND THE DISTRIBUTOR............................... 138
Management Agreement................................................ 138
Distribution Agreement.............................................. 145
Other Services...................................................... 155
Expenses Borne by the Trust......................................... 156
PORTFOLIO TRANSACTIONS AND BROKERAGE............................................ 157
NET ASSET VALUE................................................................. 162
SHAREHOLDER INVESTMENT ACCOUNT.................................................. 165
SHAREHOLDER SERVICING AGENT..................................................... 166
PURCHASE, REDEMPTION, EXCHANGES AND REPURCHASE.................................. 166
Additional CDSC Waivers Applicable to Accounts Established
Before January 1, 1998.................................. 177
Distributions in Kind................................... 180
Suspension of Redemptions........................................... 180
TAX-DEFERRED RETIREMENT PLANS................................................... 184
Cash or Deferred Profit Sharing Plans Under Section 401(k)
for Corporations and Self-Employed Individuals.......... 184
Individual Retirement Account ("IRA")............................... 184
403(b)(7) Tax Sheltered Account..................................... 187
General Information................................................. 187
</TABLE>
<PAGE> 82
<TABLE>
<S> <C>
CALCULATION OF PERFORMANCE QUOTATIONS........................................... 188
TAX STATUS
................................................................... 199
Taxation of the Funds............................................... 199
Character of Distributions to Shareholders -- General............... 202
Character of Distributions to Shareholders -- The Tax-Free
Funds................................................... 204
Discount............................................................ 205
Users of Bond-Financed Facilities................................... 206
Taxation of Options, Futures and Similar Instruments................ 206
Passive Foreign Investment Companies................................ 208
Foreign Currency Gains and Losses................................... 209
Commodity Investments............................................... 210
Dispositions of Fund Shares......................................... 210
Tax Reporting Requirements.......................................... 211
Foreign Taxes....................................................... 212
State and Local Taxes - General..................................... 213
Explanation of Fund Distributions................................... 214
Additional Information Regarding the Equity Index Fund.............. 214
Additional Information Regarding the California Tax Free
Fund and New York Tax Free Fund......................... 215
Annual Statements................................................... 216
General Information................................................. 217
ORGANIZATION AND CAPITALIZATION................................................. 217
General............................................................. 217
Voting Rights....................................................... 218
Shareholder and Trustee Liability................................... 218
OTHER INFORMATION............................................................... 219
Independent Accountants............................................. 219
Legal Counsel....................................................... 219
Share Ownership of the Funds [to be updated]........................ 219
Code of Ethics...................................................... 225
</TABLE>
<PAGE> 83
THE MAINSTAY FUNDS
The MainStay Funds (the "Trust") is an open-end management investment company
(or mutual fund) currently consisting of the following twenty-three series: MAP
Equity Fund, Blue Chip Growth Fund, California Tax Free Fund, Capital
Appreciation Fund, Convertible Fund, Equity Income Fund, Equity Index Fund,
Global High Yield Fund, Government Fund, Growth Opportunities Fund, High Yield
Corporate Bond Fund, International Bond Fund, International Equity Fund, Money
Market Fund, New York Tax Free Fund, Research Value Fund, Small Cap Growth Fund,
Small Cap Value Fund, Strategic Income Fund, Strategic Value Fund, Tax Free Bond
Fund, Total Return Fund and Value Fund (individually or collectively referred to
as a "Fund" or the "Funds"). MainStay Management, Inc. (the "Manager") serves as
the manager for the Funds and has entered into Sub-Advisory agreements with
Monitor Capital Advisors, Inc. ("Monitor") with respect to the Equity Index
Fund; Gabelli Asset Management Company ("GAMCO") with respect to the Blue Chip
Growth Fund; John A. Levin & Co., Inc. ("John A. Levin & Co.") with respect to
the Research Value Fund; Dalton Greiner, Hartman, Maher & Co. ("DGHM") with
respect to the Small Cap Value Fund; Madison Square Advisors, Inc. ("Madison
Square Advisors") with respect to the Growth Opportunities Fund, Markston
International LLC ("Markston") with respect to the MAP Equity Fund and
MacKay-Shields Financial Corporation ("MacKay-Shields") with respect to the
remaining seventeen of the Funds; MacKay-Shields, Monitor, GAMCO, John A. Levin
& Co., Dalton, Greiner, Madison Square Advisors and Markston are sometimes
jointly referred to as the "Sub-Advisers."
The Trust, formed January 9, 1986, is a Massachusetts business trust.
Each of the Series is diversified except for the Equity Index, International
Bond, Global High Yield, California Tax Free and New York Tax Free Funds, which
are non-diversified.
ADDITIONAL INFORMATION ABOUT CERTAIN FUNDS
None of the Funds alone constitutes a complete investment program.
Investment decisions for each Fund are made independently from those of the
other accounts and investment companies that may be managed by a Sub-Adviser.
However, if such other accounts or investment companies are prepared to invest
in, or desire to dispose of, securities in which one Fund invests at the same
time as another Fund managed by the same Sub-Adviser, available investments or
opportunities for sales will be allocated equitably to each. In some cases, this
procedure may adversely
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affect the size of the position obtained for or disposed of by a Fund or the
price paid or received by a Fund.
BLUE CHIP GROWTH FUND
The Fund will generally invest in Blue Chip companies, with the Sub-Adviser
selecting those securities which it perceives to be undervalued or to otherwise
have growth potential. Blue Chip companies are those which occupy (or in the
Sub-Adviser's judgment have the potential to occupy) leading market positions
that are expected to be maintained or enhanced over time. Market leaders can be
identified within an industry as those companies which have: superior growth
prospects compared with other companies in the same industry; possession of
proprietary technology with the potential to bring about major changes within an
industry; and/or leading sales within an industry, or the potential to become a
market leader.
In addition, Blue Chip companies possess at least one of the following
attributes: faster earnings growth than its competitors and the market in
general; higher profit margins relative to its competitors; strong cash flow
relative to its competitors; and/or a balance sheet with relatively low debt and
a high return on equity relative to its competitors.
The Fund's investments will usually be sold when they lose their perceived value
relative to other similar or alternative investments. Specific sources of
information used to select securities for the Fund include: general economic and
industry data provided by the U.S. government, various trade associations;
annual and quarterly reports and Form 10-Ks; and direct interviews with company
management. Research is directed towards locating stocks that are undervalued
relative to their future earnings potential.
CONVERTIBLE FUND
In selecting convertible securities for purchase or sale, the Sub-Adviser takes
into account a variety of investment considerations, including credit risk,
projected interest return and the premium for the convertible security relative
to the underlying common stock. The Fund may sell short against the box, among
other reasons, to hedge against a possible market decline in the value of the
security owned or to enhance liquidity.
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EQUITY INDEX FUND
When the Fund has cash reserves, the Fund may invest in cash equivalents, U.S.
government securities and repurchase agreements with respect thereto. The Fund
may also invest up to 25% of its total assets in securities of issuers in one
industry (unless the Index exceeds that concentration) and lend up to 30% of its
total assets to financial institutions.
GLOBAL HIGH YIELD FUND
Investors should understand that international fixed income investments involve
more risk than comparable domestic securities, due, in part, to fluctuating
currency values.
In making investments for the foreign and emerging markets sectors of the Fund,
the Sub-Adviser considers factors such as prospects for currency exchange and
interest rates, and inflation in each country, relative economic growth,
government policies influencing exchange rates and business conditions, and
credit quality of individual issuers. The Sub-Adviser will also determine, using
good faith and judgement, (1) the percentage of the Fund's assets to be invested
in each emerging market; (2) currency exposure (asset allocation across
currencies); and (3) diversified security holdings within each market.
The Fund may invest in participation interests in loans. Such participation
interests, which may take the form of interests in, or assignments of, loans,
are acquired from banks which have made loans or are members of lending
syndicates. The Fund's investments in loan participation interests will be
subject to its limitation on investments in illiquid securities and, to the
extent applicable, its limitation on investments in securities rated below
investment grade.
To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures contracts and
related options may be used for any legally permissible purpose, including as a
substitute for acquiring a basket of securities and to reduce transaction costs.
The Fund may also purchase and sell foreign exchange contracts and foreign
currency options for purposes of seeking to enhance portfolio returns and manage
portfolio risk more efficiently.
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GOVERNMENT FUND
This Fund seeks to achieve its investment objective by investing primarily in
U.S. government securities, which include obligations issued or guaranteed by
the U.S. government or its agencies or instrumentalities which are supported by:
(I) the full faith and credit of the U.S. government e.g., GNMA certificates;
(ii) the right of the issuer to borrow an amount limited to a specific line of
credit from the U.S. government; (iii) the credit of the instrumentality (e.g.,
bonds issued by the FNMA); or (iv) the discretionary authority of the U.S.
government to purchase certain obligations of U.S. government agencies or
instrumentalities.
The agencies and instrumentalities that issue U.S. government securities
include, among others specifically mentioned in this prospectus: Federal Land
Banks, Farmers Home Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Farm Credit Bank, Student Loan Marketing
Association and U.S. Maritime Administration.
The Fund anticipates that a significant portion of its portfolio may consist of
Treasury bonds, GNMA mortgage-backed certificates and other U.S. government
securities representing ownership interests in mortgage pools, such as
securities issued by FNMA and FHLMC.
Although the mortgage loans in the pool underlying a GNMA certificate will have
maturities of up to 30 years, the actual average life of a GNMA certificate
typically will be substantially less because the mortgages will be subject to
normal principal amortization and may be prepaid prior to maturity.
The duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Sub-Adviser.
HIGH YIELD CORPORATE BOND FUND
This Fund seeks to maximize current income through investment in a diversified
portfolio of high yield debt securities. Capital appreciation is a secondary
objective; and will be sought only when consistent with the Fund's primary
objective. For example, capital appreciation will be sought by lengthening the
maturities of high yield debt securities held in the Fund's portfolio during
periods when the Sub-Adviser expects interest rates to decline.
Since available yields and yield differentials vary over time, no specific level
of income or yield differential can ever be ensured.
Debt securities in which the Fund may invest include all types of debt
obligations of both domestic and foreign issuers, such as
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bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, conditional sales contracts, commercial paper and U.S. government
securities (including obligations, such as repurchase agreements, secured by
such instruments).
The Fund may invest in participation interests in loans. Such participation
interests, which may take the form of interests in, or assignments of, loans,
are acquired from banks which have made loans or are members of lending
syndicates. The Fund's investments in loan participation interests will be
subject to its limitation on investments in illiquid securities and, to the
extent applicable, its limitation on investments in securities rated below
investment grade.
The Sub-Adviser seeks to reduce risk through diversification, credit analysis
and attention to current developments and trends in both the economy and
financial markets. In addition, investments in foreign securities may serve to
provide further diversification.
INTERNATIONAL BOND FUND
The International Bond Fund is intended for investors who are seeking
competitive overall return commensurate with an acceptable level of risk from an
international portfolio of debt securities, but who also understand that
international fixed income investments involve more risk than comparable
domestic securities, due, in part, to fluctuating currency values. In making
investments for the Fund, the Sub-Adviser considers factors such as prospects
for currency exchange and interest rates, and inflation in each country,
relative economic growth, government policies influencing exchange rates and
business conditions, and quality of individual issuers. The Sub-Adviser will
also determine, using good faith and judgement, (1) country allocation; (2)
currency exposure (asset allocation across currencies); and (3) diversified
security holdings within each market.
To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures contracts and
related options may be used for any legally permissible purpose, including as a
substitute for acquiring a basket of securities and to reduce transaction costs.
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The Fund may also purchase and sell foreign exchange contracts and foreign
currency options for purposes of seeking to enhance portfolio returns or to
manage portfolio risk more efficiently. Generally, the Fund's average maturity
will be shorter when interest rates worldwide or in a particular country are
expected to rise, and longer when interest rates are expected to fall. The Fund
may use various techniques to shorten or lengthen the dollar-weighted average
maturity of its portfolio, including transactions in futures and options on
futures, interest rate swaps, caps, floors and short sales against the box. The
duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Sub-Adviser.
INTERNATIONAL EQUITY FUND
In making investments for the Fund, the Sub-Adviser considers factors such as
prospects for currency exchange and interest rates, and inflation in each
country, relative economic growth, government policies influencing exchange
rates and business conditions, and quality of individual issuers. The
Sub-Adviser will also determine, using good faith judgement, (1) country
allocation; (2) currency exposure (asset allocation across currencies); and (3)
diversified security holdings within each market. To hedge the market value of
securities held, proposed to be held or sold, or relating to foreign currency
exchange rates, the Fund may enter into or purchase securities or securities
index options, foreign currency options, and future contracts and related
options with respect to securities, indexes of securities or currencies. The
Fund also may buy and sell currencies on a spot or forward basis. Subject to
compliance with applicable rules, futures contracts and related options may be
used for any legally permissible purpose, including as a substitute for
acquiring a basket of securities and to reduce transaction costs. The Fund also
may purchase securities on a when-issued or forward commitment basis and engage
in portfolio securities lending. The Fund may use all of these techniques (1) in
an effort to manage cash flow and remain fully invested in the stock and
currency markets, instead of or in addition to buying and selling stocks and
currencies, or (2) in an effort to hedge against a decline in the value of
securities or currencies owned by it or an increase in the price of securities
which it plans to purchase. The Fund may also purchase and sell foreign currency
exchange contracts and foreign currency options for purposes of seeking to
enhance portfolio returns or to manage portfolio risk more efficiently.
The International Equity Fund may invest in American Depositary Receipts
("ADRs") European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs"), International Depositary Receipts ("IDRs") or other similar securities
convertible into securities
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of foreign issuers. An ADR is a receipt typically issued by a U.S. bank or trust
company showing that you own a foreign security. An EDR is a receipt typically
issued by a European bank or trust company showing that you own a foreign
security. GDRs and IDRs are receipts typically issued by global or international
depositories showing that you own a foreign security.
MAP EQUITY FUND
The Fund may invest in warrants. A warrant is a right which entitles its
holder, for a specified period of time, to acquire a specified number of shares
of common stock for a specified price per share. If the share price at the time
the warrant is exercised exceeds the total of the exercise price of the warrant
and its purchase price, the Fund experiences a gain to the extent this total is
exceeded by the share price. However, if the share price at the time the warrant
expires is less than the exercise price of the warrant, the Fund will suffer a
loss of the purchase price of the warrant.
The Fund restricts its investment in securities of foreign issuers to no
more than 10% of the value of the Fund's total net assets. Such securities may
be subject to additional federal taxes which would increase the cost of such
investments and may be subject to foreign government taxes which could reduce
the income yield on such securities.
In addition, foreign investments may be affected favorably or unfavorably
by changes in currency rates and exchange control regulations. There may be less
publicly available information about a foreign company than about a United
States ("U.S.") company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to those
applicable to U.S. companies. Securities of some foreign companies may be less
liquid or more volatile than securities of U.S. companies, and foreign brokerage
commissions are generally higher than in the United States. Investments in
foreign securities may also be subject to other risks different from those
affecting U.S. investments, including local political or economic developments,
expropriation or nationalization of assets, and imposition of withholding taxes
on dividend or interest payments.
In addition, the Fund may also buy "restricted" securities which cannot
be sold publicly until registered under the Securities Act of 1933. The Fund's
ability to dispose of investments in "restricted" securities at reasonable price
levels
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might be limited unless and until their registration under the Securities Act of
1933 has been completed. The Fund will endeavor to have the issuing company pay
all the expenses of any such registration, but there is no assurance that the
Fund will not have to pay all or some of these expenses.
MONEY MARKET FUND
The Fund may invest its assets in U.S. dollar-denominated securities of
U.S. or foreign issuers and in securities of foreign branches of U.S. banks,
such as negotiable certificates of deposit (Eurodollars). Since the portfolio of
the Fund may contain such securities, an investment therein involves investment
risks that are different in some respects from an investment in a fund which
invests only in debt obligations of U.S. domestic issuers. Such risks may
include future political and economic developments, the possible imposition of
foreign withholding taxes on interest income payable on the securities held in
the portfolio, possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment of the
principal of and interest on securities in the portfolio.
All of the assets of the Fund generally will be invested in obligations
which mature in 397 days or less and substantially all of these investments will
be held to maturity; however, securities collateralizing repurchase agreements
may have maturities in excess of 397 days. The Fund will, to the extent
feasible, make portfolio investments primarily in anticipation of or in response
to changing economic and money market conditions and trends. The dollar-weighted
average maturity of the Fund's portfolio may not exceed 90 days. Consistent with
the provisions of a rule of the Securities and Exchange Commission ("SEC"), the
Fund invests only in U.S. dollar-denominated money market instruments that
present minimal credit risk and, with respect to 95% of its total assets,
measured at the time of investment, that are of the highest quality. The
Sub-Adviser shall determine whether a security presents minimal credit risk
under procedures adopted by the Fund's Board of Trustees. A money market
instrument will be considered to be of the highest quality (1) if rated in the
highest rating category (i.e., Aaa or Prime-1 by Moody's, AAA or A-1 by S&P's)
by (I) any two nationally recognized statistical rating organizations ("NRSROs")
or, (ii) if rated by only one NRSRO, by that NRSRO; (2) if issued by an issuer
that has received a short-term rating from an NRSRO with respect to a class debt
obligations that is comparable priority
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and security, and that are rated in the highest rating category by (I) any two
NRSRO's or, (ii) if rated by only one NRSRO, by that NRSRO;(3) an unrated
security that is of comparable quality to a security in the highest rating
category as determined by the Sub-Adviser;(4)(I) with respect to a security that
is subject to any features that entitle the holder, under certain circumstances,
to receive the approximate amortized cost of the underlying security or
securities plus accrued interest "Demand Feature" or obligations of a person
other than the issuer of the security, under certain circumstances, to undertake
to pay the principal amount of the underlying security plus interest
"Guarantees", the Guarantee has received a rating from an NRSRO or the Guarantee
is issued by a guarantor that has received a rating from an NRSRO with respect
to a class of debt obligations that is comparable in priority and security to
the Guarantee, with certain exceptions, and (ii) the issuer of the Demand
Feature or Guarantee, or another institution, has undertaken promptly to notify
the holder of the security in the event that the Demand Feature or Guarantee is
substituted with another Demand Feature or Guarantee,(5) if it is a security
issued by a money market fund registered with the SEC under the 1940 Act; or (6)
if it is a Government Security. With respect to 5% of its total assets, measured
at the time of investment, the Fund may also invest in money market instruments
that are in the second-highest rating category for short-term debt obligations
(i.e., rated Aa or Prime-2 by Moody's or AA or A-2 by S&P).
The Fund may not invest more than 5% of its total assets, measured at the
time of investment, in securities of any one issuer that are of the highest
quality, except that the Fund may exceed this 5% limitation with respect to 25%
of its total assets for up to three business days after the purchase of
securities of any one issuer and except that this limitation shall not apply to
U.S. government securities or securities subject to certain Guarantees. The Fund
may not invest more than the greater of 1% of its total assets or one million
dollars, measured at the time of investment, in securities of any one issuer
that are in the second-highest rating category. Immediately after the
acquisition of any Demand Feature or Guarantee, the Fund, with respect to
seventy five percent of its total assets, shall not have invested more than ten
percent of its assets in securities issued by or subject to Demand Features or
Guarantees from the institution that issued the Demand Feature or Guarantee,
with certain exceptions. In addition, immediately after the acquisition of any
Demand Feature or Guarantee (or a security after giving effect to the Demand
Feature or Guarantee) that is a not within the highest rating category by
NRSROs, the Fund shall not have invested more than five percent of its total
assets in
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securities issued by or subject to Demand Features or Guarantees from the
institution that issued the Demand Feature or Guarantee. In the event that an
instrument acquired by the Fund is downgraded or otherwise ceases to be of the
quality that is eligible for the Fund, the Sub-Adviser, under procedures
approved by the Board of Trustees shall promptly reassess whether such security
presents minimal credit risk and shall recommend to the Valuation Committee of
the Board (the "Valuation Committee") that the Fund take such action as it
determines is in the best interest of the Fund and its shareholders. The
Valuation Committee, after consideration of the recommendation of the Sub-
Adviser and such other information as it deems appropriate, shall cause the Fund
to take such action as it deems appropriate, and shall report promptly to the
Board the action it has taken and the reasons for such action.
Pursuant to the rule, the Fund uses the amortized cost method of valuing
its investments, which facilitates the maintenance of the Fund's per share net
asset value at $1.00. The amortized cost method, which is normally used to value
all of the Fund's portfolio securities, involves initially valuing a security at
its cost and thereafter amortizing to maturity any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument.
The Trustees have also established procedures designed to stabilize, to
the extent reasonably possible, the Fund's price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of the
Fund's portfolio by the Trustees, at such intervals as they deem appropriate, to
determine whether the Fund's net asset value calculated by using available
market quotations or market equivalents (the determination of value by reference
to interest rate levels, quotations of comparable securities and other factors)
deviates from $1.00 per share based on amortized cost.
The extent of deviation between the Fund's net asset value based upon
available market quotations or market equivalents and $1.00 per share based on
amortized cost will be periodically examined by the Trustees. If such deviation
exceeds 1/2 of 1%, the Trustees will promptly consider what action, if any, will
be initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
shareholders, they will take such corrective action as they regard to be
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or
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payment of distributions from capital or capital gains; redemptions of shares in
kind; or establishing a net asset value per share by using available market
quotations or equivalents. In addition, in order to stabilize the net asset
value per share at $1.00, the Trustees have the authority (1) to reduce or
increase the number of shares outstanding on a pro rata basis, and (2) to offset
each shareholder's pro rata portion of the deviation between the net asset value
per share and $1.00 from the shareholder's accrued dividend account or from
future dividends.
The Fund may hold cash for the purpose of stabilizing its net asset value
per share. Holdings of cash, on which no return is earned, would tend to lower
the yield on the Fund's shares.
The Fund may also, consistent with the provisions of the rule, invest in
securities with a face maturity of more than 397 days, provided that the
security is a variable or floating rate security that meets the guidelines of
Rule 2a-7 with respect to maturity.
RESEARCH VALUE FUND
Under normal market conditions, the Fund invests at least 80% of its total
assets in common stock and other securities having equity characteristics. For
hedging purposes, the Fund may use options on securities, stock index options,
and stock index futures and related options. These investments involve certain
risks. The Fund may also invest in debt securities, including U.S. Government
securities and corporate debt securities (such as bonds, notes and debentures).
Certain of the Fund's investments in debt securities will be obligations which,
at the time of purchase, are rated "A" or better by S&P or Moody's or, if
unrated, are of comparable quality as determined by the Sub-Adviser.
However, the Fund may invest up to 5% of the value of its total assets in
non-convertible, non-investment grade debt securities (commonly known as "high
yield" or "junk" bonds). These investments involve certain risks. The Fund may
also invest in money market instruments, including repurchase agreements.
Investments in debt securities will generally be made to reduce the Fund's
equity exposure. During periods of high market valuations or adverse market
conditions or for liquidity purposes, all or any portion of the Fund's assets
may be invested temporarily in high quality debt securities or money market
instruments, or held as cash.
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SMALL CAP VALUE FUND
It is expected that stock price performance for those firms that generate cash
flow substantially exceeding normal capital spending requirements generally
betters that of the equity market as a whole. At any given time, a large
percentage of the Fund's portfolio may consist of substantial free cash flow
generators. Sell decisions are driven by the Sub-Adviser's proprietary
multifactor model or a change in fundamental expectations. Positions are
eliminated when price appreciation renders a sale rating based on the
Sub-Adviser's valuation model. The Fund may invest up to 15% of net assets in
real estate investment trusts ("REITs"). REITs are pooled investment vehicles
that invest primarily in either real estate or real estate-related loans. The
value of a REIT is affected by changes in the value of the properties owned by
the REIT or securing mortgage loans held by the REIT. REITs are dependent upon
cash flow from their investments to repay financing costs. REITs are subject to
risks generally associated with investments in real estate.
STRATEGIC INCOME FUND
In managing the Fund, the Sub-Adviser conducts a continuing review of yields and
other information derived from a data base which it maintains in managing
fixed-income portfolios. Fundamental economic cycle analysis, credit quality and
interest rate trends are among the principal factors considered by the
Sub-Adviser in determining whether to increase or decrease the emphasis placed
upon a particular type of security or bond market sector within the Fund's
investment portfolio.
In making investment decisions with respect to maturity shifts, the Sub-Adviser
takes into account a broad range of fundamental and technical indicators. The
Sub-Adviser will alter the average maturity of the portfolio in accordance with
its judgment based on the research and other methods described above.
In seeking a competitive overall return, capital appreciation may be sought by
lengthening the maturities of high yield debt securities held in the Fund's
portfolio during periods when the Sub-Adviser expects interest rates to decline.
If the Sub-Adviser is incorrect in its expectations of changes in interest
rates, or in its evaluation of the normal yield relationship between two
securities, the Fund's income, NAV and potential capital gains could decrease;
or the potential loss could increase. This and other factors may affect the
income available for distribution to shareholders.
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Since available yields and yield differentials vary over time, no specific level
of income or yield differential can ever be ensured.
Debt securities in which the Fund may invest include all types of debt
obligations of both domestic and foreign issuers, such as bonds, debentures,
notes, equipment lease certificates, equipment trust certificates, conditional
sales contracts, commercial paper, foreign government securities and U.S.
government securities (including obligations, such as repurchase agreements,
secured by such instruments).
The Fund may invest up to 30% of its total assets in equity securities. These
may include capital notes, which are securities representing beneficial
interests in a trust for which the controlling common stock is owned by a bank
holding company. These beneficial interests are commonly issued as preferred
stock but may also be issued as other types of instruments. The trust owns
debentures issued by the bank holding company and issues the preferred stock to
investors. In making investments in foreign securities the Sub-Adviser will
determine, using good faith and judgement, (1) country allocation; (2) currency
exposure (asset allocation across currencies); and (3) diversified security
holdings within each market. The Sub-Adviser may consider factors such as
prospects for currency exchange and interest rates and inflation in each
country, relative economic growth, government policies influencing exchange
rates and business conditions, and quality of individual issuers.
To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures contracts and
related options may be used for any legally permissible purpose, including as a
substitute for acquiring a basket of securities and to reduce transaction costs.
The Fund may also purchase and sell foreign currency exchange contracts for
purposes of seeking to enhance portfolio returns and manage portfolio risk more
efficiently.
Generally, the average maturity of the foreign securities held by the Fund will
be shorter when interest rates worldwide or in a particular country are expected
to rise, and longer when interest rates are expected to fall. The Fund may use
various techniques to shorten or lengthen the dollar-weighted average maturity
of its portfolio, including transactions in futures and options on
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futures, interest rate swaps, caps, floors and short sales against the box.
The duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Sub-Adviser.
The Sub-Adviser seeks to reduce risk through diversification, credit analysis
and attention to current developments and trends in both the economy and
financial markets.
STRATEGIC VALUE FUND
In managing the Fund, the Sub-Adviser conducts a rigorous, disciplined valuation
methodology to maximize the most appropriate investment levels among the three
asset classes. Fundamental economic analysis, risk and return estimations,
credit quality and interest rate trends are among the principal factors
considered by the Sub-Adviser in determining whether to increase or decrease the
emphasis placed on a particular type of security or bond within the Fund's
investment portfolio. In the event that the Sub-Adviser's analysis indicates hat
the Fund should be fully invested in only one asset group, the Sub-Adviser will
still adhere to the limitations on the amount of assets which may be allocated
to each of the three asset groups.
In analyzing different securities to assess their relative attractiveness, the
Sub-Adviser's value investment process emphasizes such factors as low price to
earnings and price to cash flow ratios, financial strength and earnings
predictability. The Fund intends to purchase those securities which it believes
to be undervalued in the market relative to comparable securities based on the
foregoing analysis.
In assessing whether a stock is undervalued, the Sub-Adviser considers, among
other factors, a company's financial strength and earnings predictability. The
Fund may provide some protection on the downside through its investment in
companies whose current stock prices reflect, in the Sub-Adviser's opinion,
either unwarranted pessimism or unrecognized value.
In selecting convertible securities for purchase or sale, the Sub-Adviser takes
into account a variety of investment considerations, including credit risk,
projected interest return and the premium for the convertible security relative
to the underlying common stock.
In seeking a competitive overall return, capital appreciation may be sought by
lengthening the maturities of high yield debt
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securities held in the Fund's portfolio during periods when the Sub-Adviser
expects interest rates to decline. If the Sub-Adviser is incorrect in its
expectations of changes in interest rates, or in its evaluation of the normal
yield relationship between two securities, the Fund's income, NAV and potential
capital gains could decrease; or the potential loss could increase. This and
other factors may affect the income available for distribution to shareholders.
Since available yields and yield differentials vary over time, no specific level
of income or yield differential can ever be ensured.
Debt securities in which the Fund may invest include all types of debt
obligations of both domestic and foreign issuers, such as bonds, debentures,
notes, equipment lease certificates, equipment trust certificates, conditional
sales contracts, commercial paper, foreign government securities and U.S.
government securities (including obligations, such as repurchase agreements,
secured by such instruments). For purposes of the Fund's investment policies,
the Fund considers preferred stock to be a debt obligation.
The Fund's investments may include capital notes, which are securities
representing beneficial interest in a trust for which the controlling common
stock is owned by a bank holding company. These beneficial interests are
commonly issued as preferred stock but may also be issued as other types of
instruments. The trust owns debentures issued by the bank holding company and
issues the preferred stock to investors.
In making investments in foreign securities the Sub-Adviser will determine,
using good faith and judgement, (1) country allocation; (2) currency exposure
(asset allocation across currencies); and (3) diversified security holdings
within each market. The Sub-Adviser may consider factors such as prospects for
currency exchange and interest rates, and inflation in each country, relative
economic growth, government policies influencing exchange rates and business
conditions, and quality of individual issuers.
To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures contracts and
related options may be used for any legally permissible purpose, including as a
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substitute for acquiring a basket of securities and to reduce transaction costs.
The Fund may also purchase and sell foreign exchange contracts and foreign
currency options for purposes of seeking to enhance portfolio returns or to
manage portfolio risk more efficiently.
TAX FREE BOND FUND
This Fund invests in obligations of states and their political subdivisions and
agencies, the interest from which is, in the opinion of the issuer's bond
counsel, exempt from regular federal income tax ("Municipal Bonds" or
"tax-exempt securities"). None of the Fund, the Sub-Adviser nor counsel to the
Fund reviews such opinions or otherwise determines independently that the
interest on a security will be classified as tax-exempt interest. Municipal
Bonds are issued to obtain funds for various public purposes. The interest on
these obligations is generally exempt from regular federal income tax in the
hands of most investors. Because the Fund may hold high-grade Municipal Bonds,
the income earned on shares of the Fund may tend to be less than it might be on
a portfolio emphasizing lower quality securities. Conversely, to the extent that
the Fund holds lower quality securities, the risk of default in the payment of
principal or interest by the issuer of a portfolio security is greater than if
the Fund held only higher quality securities. Although higher quality tax-exempt
securities may produce lower yields, they are generally more marketable. To
protect the Fund's capital under adverse market conditions, the Fund may from
time to time purchase higher quality securities or taxable short-term
investments with a resultant decrease in yield or increase in the proportion of
taxable income.
The Fund may sell a security at any time in order to improve the yield on the
Fund's portfolio. In buying and selling portfolio securities, the Fund seeks to
take advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. The Fund will not engage in arbitrage transactions.
The Fund may invest in Industrial Development and Pollution Control Bonds and
municipal lease obligations.
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From time to time, the Fund may invest 25% or more of the value of its total
assets in Municipal Bonds that are related in such a way that an economic,
business, or political development or change affecting one such security could
also affect the other securities (for example, securities whose issuers are
located in the same state). The Fund may also invest 25% or more of the value of
its total assets in Industrial Development Bonds. Further, the Fund may acquire
all or part of privately negotiated loans made to tax-exempt borrowers. To the
extent that these private placements are not readily marketable, the Fund will
limit its investment in such securities (along with all other illiquid
securities) to no more than 10% of the value of its total assets. Because an
active trading market may not exist for such securities, the price that the Fund
may pay for these securities or receive on their resale may be lower than that
for similar securities with a more liquid market.
The duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Sub-Adviser.
TOTAL RETURN FUND
The Fund may invest in common stocks, convertible securities, warrants and
fixed-income securities, such as bonds, preferred stocks and other debt
obligations, including money market instruments. The Fund will also invest in
stocks and other equity securities which it believes to be undervalued based
upon factors such as ratios of market price to book value, estimated liquidating
value and projected cash flow.
The duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Sub-Adviser.
Although the Total Return Fund does not intend to seek short-term profits,
securities in its portfolio will be sold whenever the Sub-Adviser believes it is
appropriate to do so without regard to the length of time the particular
security may have been held, subject to certain tax requirements for
qualification as a regulated investment company under the Code. A high turnover
rate involves greater expenses to the Fund and may increase the possibility of
shareholders realizing taxable capital gains. The Fund engages in portfolio
trading if it believes a transaction, net of costs (including custodian
charges), will help in achieving its investment objective.
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THE EQUITY INDEX FUND GUARANTEE
NYLIFE Inc. ("NYLIFE"), a New York corporation and a wholly owned subsidiary of
New York Life Insurance Company ("New York Life"), will guarantee
unconditionally and irrevocably pursuant to a Guaranty Agreement between NYLIFE
and the Fund (the "Guarantee") that if, exactly 10 years from the date of
purchase (the "Guarantee Date"), the net asset value of a unit equal to the net
asset value of a Fund share when purchased, plus the value of all dividends and
distributions paid, including cumulative reinvested dividends and distributions
attributable to such share paid during that 10-year period ("Guaranteed Share"),
is less than the public offering price initially paid for the share ("Guaranteed
Amount"), NYLIFE will pay for disbursement to shareholders an amount equal to
the difference between the Guaranteed Amount for each such share and the net
asset value of each such Guaranteed Share outstanding and held by shareholders
as of the close of business on the Guarantee Date. There is no charge to the
Fund or its Shareholders for the Guarantee.
If, on a particular Guarantee Date, payments must be made under the terms
of the Guarantee, the terms of the Guarantee will obligate NYLIFE
unconditionally and irrevocably to pay to the Equity Index Fund's transfer and
dividend disbursing agent for the benefit of shareholders with that Guarantee
Date an amount equal to the difference between the Guaranteed Amount and net
asset value per each Guaranteed Share (as defined in the Prospectus)
outstanding. The Equity Index Fund's transfer and dividend disbursing agent will
forward the difference between the Guaranteed Amount and the net asset value
directly to each individual shareholder.
A Guaranteed Share (the unit to which the Guaranteed Amount will apply)
is not the same as a share of the Fund. Shareholders who redeem shares, or who
elect to receive dividends and distributions in cash, will own fewer units to
which the Guaranteed Amount applies (i.e., they will own fewer Guaranteed
Shares) and therefore will lose a portion of the benefit of the Guarantee with
respect to any such redemption or dividends or distributions received in cash.
NYLIFE will pay any amounts owing under the Guarantee to the Fund's
transfer and dividend disbursing agent on the third business day following a
Guarantee Date. A pro rata portion of any amounts so paid will then be forwarded
to each shareholder holding, as of the close of business on such date,
Guaranteed Shares with that Guarantee Date. If the Guarantee Date should fall on
a weekend or on a holiday, the Guarantee Date shall be
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the first business day following the Guarantee Date. The Guarantee is intended
to assure each owner of Guaranteed Shares on a Guarantee Date that he or she
will be able to recover, as of the Guarantee Date, at a minimum, the Guaranteed
Amount (with no adjustment for inflation or the time value of money). The
Guarantee will benefit any holder of such Guaranteed Shares on the relevant
Guarantee Date, who need not be the original purchaser, and who, for example,
may own such shares by gift or inheritance.
Although the Equity Index Fund does not intend to pay dividends and
distributions in cash to shareholders (unless a shareholder elects to receive
payments in cash), such dividends and distributions which are reinvested will be
taxable to shareholders. See "Tax Status." The Guaranteed Amount does not
reflect any adjustment for the payment of taxes by a shareholder on dividends
and distributions received from the Equity Index Fund.
The obligations, if any, of NYLIFE under the Guarantee shall be
discharged when all required payments are made in full to the transfer and
dividend disbursing agent for the benefit of the shareholders or if the Equity
Index Fund's net asset value on a Guarantee Date is such that no amounts are
payable to shareholders under the terms of the Guarantee. Payment obligations
under the Guarantee will be solely the obligations of NYLIFE. Neither the Equity
Index Fund, New York Life Insurance Company, Monitor, NYLIFE Distributors, any
of their affiliates nor any other party is undertaking any obligation to the
Equity Index Fund or its shareholders with respect to the Guarantee.
Although the Guarantee has been arranged for by the Equity Index Fund and
is created under contract between the Equity Index Fund and NYLIFE, the Equity
Index Fund has no interest in, and specifically disclaims any interest in, the
proceeds payable under the Guarantee, which are payable solely to the
shareholders with a particular Guarantee Date. The designation of such
shareholders as the sole beneficiaries of the Guarantee may not be changed by
either the Equity Index Fund or such shareholders. The Guarantee is neither
transferable nor assignable by the Equity Index Fund or the shareholders it
benefits, nor may the Equity Index Fund or its shareholders cancel or waive
rights under the Guarantee. The Guarantee cannot be surrendered by either the
Fund or its shareholders for cash, except in the event that payment is made
pursuant to its terms. Neither the Equity Index Fund nor its shareholders may
use the Guarantee as a pledge for a loan, nor may the Equity Index Fund or its
shareholders
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obtain any loan from NYLIFE with respect to amounts that may be payable pursuant
to the Guarantee.
The foregoing is only a summary, and not a complete statement of the
principal terms of the Guarantee. Reference is made to the Guarantee, a specimen
copy of which has been filed as an exhibit to the Registration Statement. This
summary is subject thereto and qualified in its entirety by such reference.
If the Fund pays a dividend or distribution in cash to all Fund shareholders,
the amount of the distribution will reduce the Guaranteed Amount with respect to
each Guaranteed Share in the amount of such cash distribution. Fund shares may
be redeemed or exchanged by shareholders prior to their Guarantee Date. However,
any such redeemed or exchanged shares will lose the benefit of the Guarantee.
Following the Guarantee Date, the shares of the Equity Index Fund will be
subject to those risks normally associated with an investment in shares of a
mutual fund that invests in securities represented in the Index.
NYLIFE is a New York holding company incorporated on January 26, 1984. Audited
financial statements for NYLIFE for its most recent fiscal year ended December
31, 1998, appear in this SAI.
New York Life is a mutual life insurance company. Payment obligations under the
Guarantee will be solely the obligations of NYLIFE. None of the Fund, New York
Life, Monitor, NYLIFE Distributors Inc., NYLIFE Securities Inc., any of their
affiliates nor any other party is undertaking any obligation to the Fund or its
shareholders with respect to the Guarantee. New York Life is not obligated to
pay any claim under the Guarantee or to make additional capital contributions to
NYLIFE.
HOW THE INDEXING WORKS
The weightings of stocks in the Index are based on each stock's relative total
market capitalization (the stock's market price per share times the number of
shares outstanding). The Sub-Adviser seeks to provide investment results which
mirror the performance of the Index. The Sub-Adviser attempts to achieve this
objective by investing in all stocks in the Index in the same proportion as
their representation in the Index.
It is a reasonable expectation that there will be a close correlation between
the Fund's performance and that of the Index in both rising and falling markets.
The correlation between the performance of the Fund and the Index is expected to
be at least
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0.95. A correlation of 1.00 would indicate perfect correlation, which would be
achieved when the Fund's NAV, including the value of its dividend and capital
gains distributions, increases or decreases in exact proportion to changes in
the Index. The Fund's correlation, however, may be affected by, among other
things, transaction costs, changes in either the composition of the Index or
number of shares outstanding for the components of the Index, and the timing and
amount of shareholder redemptions, if any.
"Standard & Poor's", "S&P 500", "S&P", "Standard & Poor's 500" and "500" are
trademarks of Standard & Poor's Corporation and have been licensed for use by
Monitor Capital Advisors, Inc. S&P does not sponsor, endorse, sell or promote
the Fund or represent the advisability of investing in the Fund.
The Fund is not sponsored, endorsed, sold or promoted by S&P. S&P makes
no representation or warranty, express or implied, to the owners of the Fund or
any member of the public regarding the advisability of investing in securities
generally or in the Fund particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to Monitor is
the licensing of certain trademarks and trade names of S&P and of the S&P 500
Index which is determined, composed and calculated by S&P without regard to
Monitor or the Fund. S&P has no obligation to take the needs of Monitor or the
owners of the Fund into consideration in determining, composing or calculating
the S&P 500 Index. S&P is not responsible for and has not participated in the
determination of the prices and amount of the Fund or the timing of the issuance
or sale of the Fund or in the determination or calculation of the equation by
which the Fund is to be converted into cash. S&P has no obligation or liability
in connection with the administration, marketing or trading of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P
500 Index or any data included therein and S&P shall have no liability for any
errors, omissions, or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained by Monitor, owners of the Fund, or any
other person or entity from the use of the S&P 500 Index or any data included
therein. S&P makes no express or implied warranties, and expressly disclaims all
warranties of merchantability or fitness for a particular purpose or use with
respect to the S&P 500 Index or any data included therein. Without limiting any
of the foregoing, in no event shall S&P have any liability for any special,
punitive, indirect, or consequential damages (including lost profits), even if
notified of the possibility of such damages.
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RISK FACTORS AFFECTING CALIFORNIA MUNICIPAL SECURITIES
[TO BE UPDATED]
The following information as to certain California State ("State") risk
factors is given to investors in view of the policy of the MainStay California
Tax Free Fund of concentrating its investments in California municipal issuers.
Such information constitutes only a brief discussion, does not purport to be a
complete description and is based on information from sources believed by the
Trust to be reliable, including official statements relating to securities
offerings of California and municipal issuers, and periodic publications by
national ratings organizations. Such information, however, has not been
independently verified by the Trust.
Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives, as discussed
below, could adversely affect the market values and marketability of, or result
in default of, existing obligations of the State. Obligations of the State or
local governments may also be affected by budgetary pressures affecting the
State and economic conditions in the State. The following information
constitutes only a brief summary and is not intended as a complete description.
Certain of the California municipal securities in which the Fund may
invest may be obligations of issuers which rely in whole or in part on
California State revenues for payment of these obligations. Property tax
revenues and a portion of the State's General Fund surplus are distributed to
counties, cities and their various taxing entities and the State assumes certain
obligations theretofore paid out of local funds. Whether and to what extent a
portion of the State's General Fund will be distributed in the future to
counties, cities and their various entities, is unclear.
Certain of the California municipal securities may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, Proposition 13 added Article XIIIA to the
California Constitution. The effect of Article XIIIA is to limit ad valorem
taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
Legislation enacted by the California legislature to implement Article
XIIIA (Statutes of 1978, Chapter 292, as amended) provides that notwithstanding
any other law, local agencies may not levy any ad valorem property tax except to
pay debt service on indebtedness approved by the voters prior to July
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1, 1978, and that each county will levy the maximum tax permitted by Article
XIIIA of $4.00 per $100 assessed valuation. The apportionment of property taxes
in fiscal years after 1978-79 was revised pursuant to Statutes of 1979, Chapter
282, which provides relief funds from State moneys beginning in fiscal year
1979-80 and is designed to provide a permanent system for sharing State taxes
and budget funds with local agencies. Under Chapter 282, cities and counties
receive more of the remaining property tax revenues collected under Proposition
13 instead of direct State aid. School districts receive a correspondingly
reduced amount of property taxes, but receive compensation directly from the
State and are given additional relief.
On November 4, 1986, California voters approved an initiative statute
known as "Proposition 62." This statute (I) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity; (ii)
requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction; (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed; (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA of the California Constitution; (v) prohibits the imposition of
transaction taxes and sales taxes on the sale of real property by local
governments; (vi) requires that any tax imposed by a local government on or
after August 1, 1985 be ratified by a majority of the electorate within two
years of the adoption of the initiative or be terminated by November 15, 1988;
(vii) requires that, in the event a local government fails to comply with the
provisions of this measure, a reduction in the amount of tax revenue allocated
to such local government occur in an amount equal to the revenues received by
such entity attributable to the tax levied in violation of the initiative; and
(viii) permits these provisions to be amended exclusively by the voters of the
State of California. In September 1988, the California Court of Appeals held
that it was unconstitutional to require that local tax measures be submitted to
the electorate, as described in (vi) above.
In September 1995, the California Supreme Court upheld the
constitutionality of Proposition 62, creating uncertainty as to the legality of
certain local taxes enacted by non-charter cities in California without voter
approval.
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On November 5, 1996, voters approved Proposition 218, entitled the "Right
to Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions place limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges and
assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives. There are a number of
ambiguities concerning the Proposition and its impact on local governments and
their bonded debt which will require interpretation by the courts or the
Legislature. Proposition 218 does not affect the State or its ability to levy or
collect taxes.
The State is subject to an annual appropriations limit imposed by Article
XIIIB of the State Constitution (the "Appropriations Limit"). The Appropriations
Limit does not restrict appropriations to pay debt service on the bonds or other
voter-authorized bonds. Article XIIIB prohibits the State from spending
"appropriations subject to limitation" in excess of the Appropriations Limit.
"Appropriations subject to limitation," with respect to the State, are
authorizations to spend "proceeds of taxes," which consist of tax revenues, and
certain other funds, including proceeds from regulatory licenses, user charges
or other fees to the extent that such proceeds exceed "the cost reasonably borne
by that entity in providing the regulation, product or service," but "proceeds
of taxes" exclude most State subventions to local governments, tax refunds and
some benefit payments such as unemployment insurance. No limit is imposed on
appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees and certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government and, pursuant to Proposition 111,
appropriations for qualified capital outlay projects and appropriations of
revenues derived from any increase in gasoline taxes and motor vehicle weight
fees above January 1, 1990 levels, and appropriation of certain special taxes
imposed by initiative (e.g., increased cigarette and tobacco taxes enacted by
Proposition 99 in 1988). The Appropriations Limit may also be exceeded in cases
of emergency.
The State's Appropriations Limit in each year is based on the limit for
the prior year, adjusted annually for changes in
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State per capita personal income and changes in population, and adjusted, when
applicable, for any transfer of financial responsibility of providing services
to or from another unit of government. The measurement of change in population
is a blended average of statewide overall population growth, and change in
attendance at local school and community college ("K-14") districts. As amended
by Proposition 111, the Appropriations Limit is tested over consecutive two-year
periods. Any excess of the aggregate "proceeds of taxes" received over such a
two-year period above the combined Appropriations Limits for those two years is
divided equally between transfers to K-14 districts and refunds to taxpayers.
The legislature enacted legislation to implement Article XIIIB which
defines certain terms used in Article XIIIB and sets forth the methods for
determining the Appropriations Limit. California Government Code Section 7912
requires an estimate of the Appropriations Limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.
On November 9, 1988, the State's voters approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed State
funding of public education below the university level and the operation of the
State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by Proposition
111, enacted on June 5, 1990), K-14 schools are guaranteed the greater of (a) in
general, a fixed percent of General Fund revenues ("Test 1"), (b) the amount
appropriated to K-14 schools in the prior year, adjusted for changes in the cost
of living (measured as in Article XIIIB by reference to State per capita
personal income) and enrollment ("Test 2"), or (c) a third test, which would
replace Test 2 in any year when the percentage growth in per capita General Fund
revenues from the prior year plus one half of one percent is less than the
percentage growth in State per capita personal income ("Test 3"). Under Test 3,
schools would receive the amount appropriated in the prior year adjusted for
changes in enrollment and per capita General Fund revenues, plus an additional
small adjustment factor. If Test 3 is used in any year, the difference between
Test 3 and Test 2 would become a "credit" to schools which would be the basis of
payments in future years when per capita General Fund revenue growth exceeds per
capita personal income growth. Legislation adopted prior to the end of the
1988-89 fiscal year, implementing Proposition 98, determined the K-14 schools'
funding guarantee under Test 1 to be 40.3 percent of the General Fund tax
revenues, based on 1986-87
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appropriations. The percentage has been adjusted to approximately 35 percent to
account for a subsequent redirection of local property taxes, since such
redirection directly affects the share of General Fund revenues to schools.
Proposition 98 permits the legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIIIB limit to
K-14 schools.
During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 entitlements, and also intended that the "extra" payments
would not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,200 from Fiscal Year
1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off- budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State will repay $935
million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count as appropriations that count toward satisfying the
Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact.
Substantially increased General Fund revenues, above initial budget
projections, in the fiscal year 1994-95 and thereafter have resulted or will
result in retroactive increases in Proposition 98 appropriations from subsequent
fiscal years' budgets. Because of the State's increasing revenues, per-pupil
funding at the K-12 level has increased by about 22% from the level in place
from 1991-92 through 1993-94, and is estimated at about $5,150 per ADA in
1997-98. A significant amount of the "extra" Proposition 98 monies in the last
few years have been allocated to special programs, most particularly an
initiative to allow each classroom from grades K-3 to have no more than 20
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pupils by the end of the 1997-98 school year. There are also new initiatives for
reading skills and to upgrade technology in high schools.
Certain California municipal securities in the Fund may be obligations
which are secured in whole or in part by a mortgage or deed of trust on real
property. Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
home mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. Therefore, the
effective minimum period for foreclosing on a mortgage could be in excess of
seven months after the initial default. Such time delays in collections could
disrupt the flow of revenues available to an issuer for the payment of debt
service on the outstanding obligations if such defaults occur with respect to a
substantial number of home mortgages or deeds of trust securing an issuer's
obligations.
Certain California municipal securities in the Fund may be obligations
which finance the acquisition of single family home mortgages for low- and
moderate-income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to the California
statutory limitations described above applicable to obligations secured by real
property. Under California anti-deficiency legislation, there is no personal
recourse against a mortgagor of a single family residence purchased with the
loan secured by the mortgage.
Under California law, mortgage loans secured by single family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years of the term of the mortgage loan, and cannot in any
event exceed six months' advance interest on the amount prepaid in excess of 20
percent of the original principal amount of the mortgage loan. This limitation
could affect the flow of revenues available to an issuer for debt service on the
outstanding debt obligations which financed such home mortgages.
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On January 17, 1994, a major earthquake measuring an estimated 6.8 on the
Richter Scale struck Los Angeles. Significant property damage to private and
public facilities occurred in a four-county area including northern Los Angeles
County, Ventura County, and parts of Orange and San Bernardino Counties. The
possibility exists that another such earthquake could create a major dislocation
of the State economy.
Congress passed and the President signed (on August 22, 1996) the
Personal Responsibility and Work Opportunity Act of 1996 making a fundamental
reform of the current welfare system. Among many provisions, the Law includes:
(I) conversion of Aid to Families with Dependent Children from an entitlement
program to a block grant titled Temporary Assistance for Needy Families (TANF),
with lifetime time limits on TANF recipients, work requirements and other
changes; (ii) provisions denying certain federal welfare and public benefits to
legal noncitizens, allowing states to elect to deny additional benefits
(including TANF) to legal noncitizens, and generally denying almost all benefits
to illegal immigrants; and (iii) changes in the Food Stamp program, including
reducing maximum benefits and imposing work requirements.
As part of the 1997-98 Budget Act legislative package, the Legislature
and Governor agreed on a comprehensive reform of the State's public assistance
programs to implement the new federal law. The new basic State welfare program
is called California Work Opportunity and Responsibility to Kids Act
("CalWORKs"), which replaces the former Aid to Families with Dependent Children
(AFDC) and Greater Avenues to Independence (GAIN) programs effective January 1,
1998. Consistent with the federal law, CalWORKs contains new time limits on
receipt of welfare aid, both lifetime as well as for any current period of aid.
The centerpiece of CalWORKs is the linkage of eligibility to work participation
requirements. Administration of the new Welfare-to-Work programs will be
largely at the county level, and counties are given financial incentives for
success in this program.
Although the long-term impact of the new federal Law and CalWORKs
cannot be determined until there has been more experience, the State does not
presently anticipate that these new programs will have an adverse financial
impact on the General Fund. Overall TANF grants from the federal government are
expected to equal or exceed the amounts the State would have received under the
old AFDC program.
Pressures on the State's budget in the late 1980's and early 1990's were
caused by a combination of external economic conditions (including a recession
which began in 1990) and growth
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of the largest General Fund Programs - K-14 education, health, welfare and
corrections - at rates faster than the revenue base. During this period,
expenditures exceeded revenues in four out of six years up to 1992-93, and the
State accumulated and sustained a budget deficit approaching $2.8 billion at its
peak at June 30, 1993. Between the 1991-92 and 1994-95 Fiscal Years, each budget
required multibillion dollar actions to bring projected revenues and
expenditures into balance, including significant cuts in health and welfare
program expenditures; transfers of program responsibilities and funding from the
State to local governments; transfer of about $3.6 billion in annual local
property tax revenues from other local governments to local school districts,
thereby reducing State funding for schools under Proposition 98; and revenue
increases (particularly in the 1991-92 Fiscal Year budget), most of which were
for a short duration.
Despite these budget actions, the effects of the recession led to large,
unanticipated budget deficits. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to budget to retire it in one year,
so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal year
revenue anticipation warrants to partly finance the deficit into the 1995-96
fiscal year.
Another consequence of the accumulated budget deficits, together with
other factors such as disbursement of funds to local school districts "borrowed"
from future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to
rely on external debt markets to meet its cash needs, as a succession of notes
and revenue anticipation warrants were issued in the period from June 1992 to
July 1994, often needed to
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pay previously maturing notes or warrants. These borrowings were used also in
part to spread out the repayment of the accumulated budget deficit over the end
of a fiscal year, as noted earlier. The last and largest of these borrowings was
$4.0 billion of revenue anticipation warrants which were issued in July, 1994
and matured on April 25, 1996.
The State's financial condition improved markedly during the 1995-96 and
1996-97 fiscal years, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint
based on the actions taken in earlier years. The State's cash position also
improved, and no external deficit borrowing has occurred over the end of these
two fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96 and $1.6 billion in 1996-97) than were initially planned when the
budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. The accumulated budget deficit from the
recession years was finally eliminated. In the Governor's 1998-99 Budget
Proposal, released January 9, 1998, the Department of Finance reported that the
State's budget reserve (the SFEU) totaled $461 million as of June 30, 1997.
On January 9, 1997, the Governor released his proposed budget for the
1997-98 Fiscal Year (the "Proposed Budget"). The Proposed Budget estimated
General Fund revenues and transfers of about $50.7 billion, and proposed
expenditures of $50.3 billion. In May 1997, the Department of Finance increased
its revenue estimate for the upcoming fiscal year by $1.3 billion, in response
to the continued strong growth in the State's economy.
In May, 1997, action was taken by the California Supreme Court in an
ongoing lawsuit, PERS v. Wilson, which made final a judgment against the State
requiring an immediate payment from the General Fund to the Public Employees
Retirement Fund ("PERF") to make up certain deferrals in annual retirement fund
contributions which had been legislated in earlier years for budget savings, and
which the courts found to be unconstitutional. On July 30, 1997, following a
direction from the Governor, the Controller transferred $1.228 billion from the
General Fund to the PERF in satisfaction of the judgment, representing the
principal amount of the improperly deferred payments from 1995-96 and 1996-97.
In late 1997, the plaintiffs filed a claim with the State Board of
Control for payment of interest under the Court rulings
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in an amount of $308 million. The Department of Finance has recommended approval
of this claim. If approved by the Board of Control, the claim would become part
of a claims bill to be paid in the 1998-99 Fiscal Year.
Once the pension payment of $1.228 billion eliminated essentially all the
"increased" revenue in the budget, final agreement was reached within a few
weeks on a welfare reform package and the remainder of the budget. The
Legislature passed the Budget Bill on August 11, 1997, along with numerous
related bills to implement its provisions. On August 18, 1997, the Governor
signed the Budget Act, but vetoed approximately $314 million of specific
spending items, primarily in health and welfare and education areas from both
the General Fund and Special Funds. Most of this spending (approximately $200
million) was restored in later legislation passed before the end of the
Legislative Session.
The Budget Act anticipated General Fund revenues and transfers of $52.5
billion (a 6.8 percent increase over the final 1996-97 amount), and expenditures
of $52.8 billion (an 8.0 percent increase from the 1996-97 levels). The Budget
Act also included Special Fund expenditures of $14.4 billion (as against
estimated Special Fund revenues of $14.0 billion), and $2.1 billion of
expenditures from various Bond Funds. Following enactment of the Budget Act, the
State implemented its normal annual cash flow borrowing program, issuing $3.0
billion of notes which mature on June 30, 1998.
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large increase in
funding for K-14 education under Proposition 98, reflecting strong revenues
which exceeded initial budgeted amounts. Part of the nearly $1.75 billion in
increased spending was allocated to prior fiscal years. Funds were provided to
fully pay for the cost-of-living-increase component of Proposition 98, and to
extend the class size reduction and reading initiatives.
2. The Budget Act reflected the $1.228 billion pension case judgment
payment, and brought funding of the State's pension contribution back to the
quarterly basis which existed prior to the deferral actions which were
invalidated by the courts.
3. Funding from the General Fund for the University of California and
California State University was increased by about 6 percent ($121 million and
$107 million, respectively), and there was no increase in student fees.
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4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels, adjusted for caseload changes.
5. Health and welfare costs were contained, continuing generally the
grant levels from prior years, as part of the initial implementation of the new
CalWORKs program.
6. Unlike prior years, this Budget Act did not depend on uncertain
federal budget actions. About $300 million in federal funds, already included in
the federal FY 1997 and 1998 budgets, was included in the Budget Act, to offset
incarceration costs for illegal aliens.
7. The Budget Act contained no tax increases, and no tax reductions. The
Renters Tax Credit was suspended for another year, saving approximately $500
million.
The Department of Finance released updated estimates for the 1997-98
Fiscal Year on January 9, 1998 as part of the Governor's 1998-99 Fiscal Year
Budget Proposal. Total revenues and transfers are projected at $52.9 billion, up
approximately $360 million from the Budget Act projection. Expenditures for the
fiscal year are expected to rise approximately $200 million above the original
Budget Act, to $53.0 billion. The balance in the budget reserve, the SFEU, is
projected to be $329 million at June 30, 1998, compared to $461 million at June
30, 1997.
At the end of the Legislative Session on September 13, 1997, the
Legislature passed and the Governor later signed several bills encompassing a
coordinated package of fiscal reforms, mostly to take effect after the 1997-98
Fiscal Year. Included in the package are a variety of phased-in tax cuts,
conformity with certain provisions of the federal tax reform law passed earlier
in the year, and reform of funding for county trial courts, with the State to
assume greater financial responsibility. The Department of Finance estimates
that the major impact of these fiscal reforms will occur in Fiscal Year 1998-99
and subsequent years.
On January 9, 1998, the Governor released his Budget Proposal for the
1998-99 Fiscal Year (the "Governor's Budget"). The Governor's Budget projects
total General Fund revenues and transfers of $55.4 billion, a $2.5 billion
increase (4.7 percent) over revised 1997-98 revenues. This revenue increase
takes into account reduced revenues of approximately $600 million from the 1997
tax cut package, but also assumes approximately $500 million additional revenues
primarily associated with capital gains realizations. The Governor's Budget
notes, however, that capital
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gains activity and the resultant revenues derived from it are very hard to
predict.
Total General Fund expenditures for 1998-99 are recommended at $55.4
billion an increase of $2.4 billion (4.5 percent) above the revised 1997-98
level. The Governor's Budget includes funds to pay the interest claim relating
to the court decision on pension fund payments, PERS v. Wilson. The Governor's
Budget projects that the State will carry out its normal intra-year cash flow
external borrowing in 1998-99, in an estimated amount of $3.0 billion. The
Governor's Budget projects that the budget reserve, the SFEU, will be $296
million at June 30, 1999, slightly lower than the projected level at June 30,
1998 PERS liability.
The Governor's Budget projects Special Fund revenues of $14.7 billion,
and Special Fund expenditures of $15.2 billion, in the 1998-99 Fiscal Year. A
total of $3.2 billion of bond fund expenditures are also proposed.
On December 6, 1994, Orange County, California (the "County"), together
with its pooled investment funds (the "Funds") filed for protection under
Chapter 9 of the federal Bankruptcy Code, after reports that the Funds had
suffered significant market losses in their investments, causing a liquidity
crisis for the Funds and the County. More than 200 other public entities, most
of which, but not all, are located in the County, were also depositors in the
Funds. The bankruptcy filing stemmed from approximately $1.7 billion in losses
suffered by the County's investment pool due to investments in high risk
"derivative" securities. On June 12, 1996, it emerged from bankruptcy after the
successful sale of $880 million in municipal bonds allowed the County to pay off
the last of its creditors. On January 7, 1997, the County returned to the
municipal bond market with a $136 million bond issue maturing in 13 years at an
insured yield of 7.23%.
The State is a party to numerous legal proceedings, many of which
normally recur in governmental operations. In addition, the State is involved in
certain other legal proceedings which, if decided against the State, may require
the State to make significant future expenditures or may impair future revenue
sources.
The Bonds have received ratings of "A1" by Moody's Investors Service,
"A+" by Standard & Poor's, a division of The McGraw-Hill Companies and "AA-" by
Fitch ICBA, Inc. An explanation of the significance and status of such credit
ratings may be obtained from the rating agencies furnishing the same. There is
no assurance that such ratings will continue for any given period of
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time or that they will not be revised or withdrawn entirely by any such rating
agencies, if in their respective judgments, circumstances so warrant. A revision
or withdrawal of any such credit rating could have an effect on the market price
of the Bonds. After the Bonds are rated, the State Treasurer intends to provide
appropriate periodic credit information to the bond rating agencies to assist in
maintaining the ratings on the Bonds.
RISK FACTORS AFFECTING NEW YORK MUNICIPAL SECURITIES
The following information as to certain New York State ("State") and New
York City ("City") risk factors is given to investors in view of the policy of
the MainStay New York Tax Free Fund of concentrating its investments in New York
municipal issuers. Such information constitutes only a brief discussion, does
not purport to be a complete description and is based on information from
sources believed by the Trust to be reliable, including official statements
relating to securities offerings of New York and municipal issuers, and periodic
publications by national ratings organizations. Such information, however, has
not been independently verified by the Trust.
There are a number of methods by which the State itself may incur debt.
The State may issue general obligation bonds. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State. With the exception of general obligation housing bonds
(which must be paid in equal annual installments or installments that result in
substantially level or declining debt service payments, within 50 years after
issuance, commencing no more than three years after issuance), general
obligation bonds must be paid in equal annual installments or installments that
result in substantially level or declining debt service payments, within 40
years after issuance, beginning not more than one year after issuance of such
bonds.
The State may undertake short-term borrowings without voter approval (I)
in anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes (TRANs), and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes (BANs). TRANs must mature within one year from
their dates of issuance and may not be refunded or refinanced beyond such
period. However, since 1990 the State's
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ability to issue TRANs has been limited due to enactment of the fiscal reform
program which created LGAC. BANs may only be issued for the purposes and within
the amounts for which bonds may be issued pursuant to voter authorizations. Such
BANs must be paid from the proceeds of the sale of bonds in anticipation of
which they were issued or from other sources within two years of the date of
issuance or, in the case of BANs for housing purposes, within five years of the
date of issuance. In order to provide flexibility within these maximum term
limits, the State has utilized the BANs authorization to conduct a commercial
paper program to fund disbursements eligible for general obligation bond
financing.
Pursuant to specific constitutional authorization, the State may also
directly guarantee certain public authority obligations. The State Constitution
provides for the State guarantee of the repayment of certain borrowings for
designated projects of the New York State Thruway Authority, the Job Development
Authority and the Port Authority of New York and New Jersey. The State has never
been called upon to make any direct payments pursuant to such guarantees. State
guaranteed bonds of the Port Authority of New York and New Jersey were fully
retired on December 31, 1996. State guaranteed bonds issued by the Thruway
Authority were fully retired on July 1, 1995.
In February 1997, the Job Development Authority (JDA) issued
approximately $85 million of State guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
finances. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities were suspended in 1995. JDA recently
resumed its lending activities under a revised set of lending programs and
underwriting guidelines. As a result of the structural imbalances in JDA's
capital structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed the 1997 refinancing. JDA anticipates that
it will transact additional refinancings in 1999, 2000 and 2003 to complete its
long-term plan of finance and further alleviate cash flow imbalances which are
likely to occur in future years. The State does not anticipate that it will be
called upon to make any payments pursuant to the State guarantee in the 1998-99
fiscal year.
Payments of debt service on State general obligation and State-guaranteed
bonds and notes are legally enforceable obligations of the State.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual obligation financings, which
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involve obligations of public authorities or municipalities that are State
supported but not general obligations of the State. Under these financing
arrangements, certain public authorities and municipalities have issued
obligations to finance the construction and rehabilitation of facilities or the
acquisition and rehabilitation of equipment, and expect to meet their debt
service requirements through the receipt of rental or other contractual
agreement by the State to make payments to a public authority, municipality or
other entity, the State's obligation to make such payments is generally
expressly made subject to appropriation by the Legislature and the actual
availability of money to the State for making the payments. The State has also
entered into a financing arrangement with LGAC to restructure the way the State
makes certain local aid payments.
The State also participates in the issuance of certificates of
participation (COPs) in a pool of leases entered into by the State's Office of
General Services on behalf of several State departments and agencies interested
in acquiring operational equipment or in certain cases, real property.
Legislation enacted in 1986 established restrictions upon and centralized State
control, through the Comptroller and the Director of the Budget, over the
issuance of COPs representing the State's contractual obligation, subject to
annual appropriation by the Legislature and availability of money, to make
installment or lease-purchase payments for the State's acquisition of such
equipment or real property.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
The fiscal stability of the State is related in part to the fiscal
stability of its public authorities. For the purposes of this Annual Information
Statement, public authorities refer to public benefit corporations, created
pursuant to State law, other than local authorities. Public authorities are not
subject to the constitutional restrictions on the incurrence of debt which apply
to the State itself and may issue bonds and notes within the amounts and
restrictions set forth in legislative authorization. The State's access to the
public credit markets could be impaired and the market price of its outstanding
debt may be materially and adversely affected if any of its public authorities
were to default on their respective obligations. As of December 31, 1997, there
were 17 public authorities that had outstanding debt of $ 100 million or more,
and the aggregate outstanding debt, including refunding bonds, of all State
public authorities was
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$84 billion, only a portion of which constitutes State-supported or
State-related debt.
In 1990, as part of a State fiscal reform program, legislation was enacted
creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments that had been
traditionally funded through the State's annual seasonal borrowing. The
legislation authorized LGAC to issue its bonds and notes in an amount to yield
net proceeds not in excess of $4.7 billion (exclusive of certain refunding
bonds). Over a period of years, the issuance of these long-term obligations,
which are to be amortized over no more than 30 years, was expected to eliminate
the need for continued short-term seasonal borrowing. The legislation also
dedicated revenues equal to one-quarter of the four cent State sales and use tax
to pay debt service on these bonds. The legislation also imposed a cap on the
annual seasonal borrowing of the State at $4.7 billion, less net proceeds of
bonds issued by LGAC and bonds issued to provide for capitalized interest,
except in cases where the Governor and the legislative leaders have certified
the need for additional borrowing and provided a schedule for reducing it to the
cap. If borrowing above the cap is thus permitted in any fiscal year, it is
required by law to be reduced to the cap by the fourth fiscal year after the
limit was first exceeded. This provision capping the seasonal borrowing was
included as a covenant with LGAC's bondholders in the resolution authorizing
such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds
of $4.7 billion, completing the program. The impact of LGAC's borrowing, as well
as other changes in revenue and spending patterns, is that the State has been
able to meet its cash flow needs throughout the fiscal year without relying on
short-term seasonal borrowings.
Except for the Series 1998F Refunding Bonds maturing on September 15,
2008, Moody's Investors Service, Inc. ("Moody's") has given the Series 1998F
Refunding Bonds a rating of "A2" and Standard & Poor's Ratings Group ("S&P") has
given the Series 1998F Refunding Bonds a rating of "A." Moody's and S&P will
give the Series 1998F Refunding Bonds maturing on September 15,2008, a rating of
"Aaa" and AAA, respectively with the understanding that upon delivery of such
Bonds, a municipal bond insurance policy will be issued by Ambac Assurance
Corporation.
Ratings reflect only the respective views of such organizations, and an
explanation of the significance of such ratings must be obtained from the rating
agency furnishing the same. There is no assurance that a particular rating will
continue for any given period of time or that any such rating
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will not be revised downward or withdrawn entirely if, in the judgment of the
agency originally establishing the rating, circumstances so warrant. A downward
revision or withdrawal of such ratings, or either of them, may have an effect on
the market price of the Series 1998F Refunding Bonds.
The State's current fiscal year began on April 1, 1998 and ends on March
31, 1999 and is referred to herein as the State's 1998-99 fiscal year. This
section of the AIS reflects estimates of receipts and disbursements for the
State's 1998-99 fiscal year as formulated in the Financial Plan released on June
25, 1998. Additional information on the State's finances will be released in
quarterly updates to the Financial Plan. Information on the State's Capital
Program and Financing Plan for the 1998-99 through 2002-03 fiscal years will be
released on or before July 30, 1998. The update to the State's financial
projections based upon Generally Accepted Accounting Principles (GAAP) will be
released on or before September 1, 1998.
The Legislature adopted the debt service component of the State budget
for the 1998-99 fiscal year on March 30,1998 and the remainder of the budget on
April 18, 1998. In the period prior to adoption of the budget for die current
fiscal year, the Legislature also enacted appropriations to permit the State to
continue its operations and provide for other purposes. On April 25, 1998, the
Governor vetoed certain items that the Legislature added to the Executive
Budget. The Legislature had not overridden any of the Governors vetoes as of the
start of the legislative recess on June 19, 1998 (under the State Constitution,
the Legislature can override one or more of the Governor's vetoes with the
approval of two-thirds of the members of each house).
General Fund disbursements in 1998-99 are now projected to grow by $2.43
billion over 1997-98 levels, or $690 million more than proposed in the
Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State projects that the 1998-99 State Financial Plan is balanced on
a cash basis, with an estimated reserve for future needs of $761 million.
The State's enacted budget includes several new multi-year tax reduction
initiatives, including acceleration of State-funded property and local income
tax relief for senior citizens under the School Tax Relief Program (STAR),
expansion of the child care income-tax credit for middle-income families, a
phased-in reduction of the general business tax, and reduction of several
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other taxes and fees, including an accelerated phase-out of assessments on
medical providers. The enacted budget also provides for significant increases in
spending for public schools, special education programs, and for the State and
City university systems. It also allocates $50 million for a new Debt Reduction
Reserve Fund (DRRF) that may eventually be used to pay debt service costs on or
to prepay outstanding State-supported bonds.
The 1998-99 State Financial Plan projects a closing balance in the
General Fund of $1.42 billion that is comprised of a reserve of $761 million
available for future needs, a balance of $400 million in the Tax Stabilization
Reserve Fund (TSRF), a balance of $158 million in the Community Projects Fund
(CPF), and a balance of $100 million in the Contingency Reserve Fund (CRF). The
TSRF can be used in the event of an unanticipated General Fund cash operating
deficit, as provided under the State Constitution and State Finance Law. The CPF
is used to finance various legislative and executive initiatives. The CRF
provides resources to help finance any extraordinary litigation costs during the
fiscal year.
Many complex political, social and economic forces influence the State's
economy and finances, which may in turn affect the State's Financial Plan. These
forces may affect the State unpredictably from fiscal year to fiscal year and
are influenced by governments, institutions, and organizations that are not
subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The Division of Budget believes that
its projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
Total General Fund receipts in 1998-99 are projected to be $37.56
billion, an increase of over $3 billion from the $34.55 billion recorded in
1997-98. This total includes $34.36 billion in tax receipts, $1.40 billion in
miscellaneous receipts, and $1.80 billion in transfers from other funds.
The transfer of a portion of the surplus recorded in 1997-98 to 1998-99
exaggerates the "real" growth in State receipts from year to year by depressing
reported 1997-98 figures and inflating 1998-99 projections. Conversely, the
incremental cost of tax reductions newly effective in 1998-99 and the impact of
statutes earmarking certain tax receipts to other funds work to depress apparent
growth below the underlying growth in receipts attributable to expansion of the
State's economy. On an adjusted
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basis, State tax revenues in 1998-99 fiscal year are projected to grow at
approximately 7.5 percent, following an adjusted growth roughly nine percent in
the 1997-98 fiscal year.
The personal income tax is imposed on die income of individuals, estates
and trusts and is based on federal definitions of income and deductions. This
tax continues to account for over half of the State's General Fund receipts
base. Net personal income tax collections are projected to reach $21.24 billion,
nearly $3.5 billion above the reported 1997-98 collection total. Since 1997
represented the completion of the 20 percent income tax reduction program
enacted in 1995, growth from 1997 to 1998 will be unaffected by major income tax
reductions. Adding to the projected annual growth is the net impact of the
transfer of the surplus from 1997-98 to the current year which affects reported
collections by over $2.4 billion on a year-over-year basis, as partially offset
by the diversion of slightly over $700 million in income tax receipts to the
STAR fund to finance the initial year of the school tax reduction program. The
STAR program was enacted in 1997 to increase the State share of school funding
and reduce residential school taxes. Adjusted for these transactions, the growth
in net income tax receipts is roughly $1.7 billion, an increase of over 9
percent. This growth is largely a function of over 8 percent growth in income
tax liability projected for 1998 as well as the impact of the 1997 tax year
settlement on 1998-99 net collections.
User taxes and fees are comprised of three-quarters of the State four
percent sales and use tax (the balance, one percent, flows to support Local
Government Assistance Corporation (LGAC) debt service requirements), cigarette,
alcoholic beverage, container, and auto rental taxes, and a portion of the motor
fuel excise levies. Also included in this category am receipts from the motor
vehicle registration fees and alcoholic beverage license fees. A portion of the
motor fuel tax and motor vehicle registration fees and all of the highway use
tax are earmarked for dedicated transportation funds.
Receipts from user taxes and fees are projected to total $7.14 billion,
an increase of $107 million from reported collections in the prior year. The
sales tax component of this category accounts for all of the 1998-99 growth, as
receipts from all other sources decline $100 million. The growth in yield of the
sales tax in 1998-99, after adjusting for tax law and other changes, is
projected at 4.7 percent. The yields of most of the excise taxes in this
category show a long-term declining trend, particularly cigarette and alcoholic
beverage taxes. These General Fund declines are exacerbated in 1998-99 by
revenue losses from scheduled and enacted tax reductions, and by an
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increase in earmarking of motor vehicle registration fees to the Dedication
Highway and Bridge Trust Fund.
Business taxes include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as
gross-receipts-based taxes on utilities and gallonage-based petroleum business
taxes. Beginning in 1994, a is percent surcharge on these levies began to be
phased out and, for most taxpayers, there is no surcharge liability for taxable
periods ending in 1997 and thereafter.
Total business tax collections in 1998-99 are now projected to be $4.96
billion, $91 million less than received in the prior fiscal year. The category
includes receipts from the largely income-based levies on general business
corporations, banks and insurance companies, gross receipts taxes on energy and
telecommunication service providers and a per-gallon imposition on petroleum
business. The year-over-year decline in projected receipts in this category is
largely attributable to statutory changes between the two years. These include
the first year of utility-tax rate cuts and the Power for Jobs tax reduction
program for energy providers, and the scheduled additional diversion of General
Fund petroleum business and utility tax receipts to other funds. In addition,
profit growth is also expected to slow in 1998.
Other taxes include receipts include estate, gift and real estate
transfer taxes, a tax on gains from the sale or transfer certain real estate
(this tax was repealed in 1996), a pari-mutuel tax and other minor levies. They
are no projected to total $1.02 billion - $75 million below last year's amount.
Two factors account for a significant part of the expected decline in
collections from this category. First, the effects of the elimination of the
property gains tax collections; second, a decline in estate tax receipts,
following the explosive growth recorded in 1997-98, when receipts expanded by
over 16 percent.
Miscellaneous receipts include investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues. Total
miscellaneous receipts are projected to reach $1.40 billion, down almost $200
million from the prior year, reflecting the loss of non-recurring receipts in
1997-98 and the growing effects of the phase-out of the medical provider
assessments.
Transfers from other funds to the General Fund consist primarily of tax
revenues in excess of debt one percent sales tax used to support payments to
LGAC. Transfers from other funds are expected to total $1.8 billion, or $222
million less than total
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receipts from this category during 1997-98. Total transfers of sales taxes in
excess of LGAC debt service requirements are expected by approximately $51
million, while transfers from all other funds are expected to fall by $273
million, primarily reflecting the absence, in 1998-99, of a one-time transfer of
nearly $200 million for retroactive reimbursement of certain social services
claims from the federal government.
General Fund disbursements in 1998-99, including transfers to support
capital projects, debt service and other funds are estimated at $36.78 billion.
This represents an increase of $2.43 billion or 7.1 percent from 1997-98. Nearly
one-half of the growth is for educational purposes, reflecting increased support
for public schools, special education programs and the State and City university
systems. The remaining increase is primarily for Medicaid, mental hygiene, and
other health and social welfare programs, including children and family
services. The 1998-99 Financial Plan also includes funds for the current
negotiated salary increases for State employees, as well as increased transfers
for debt service.
Grants to Local Governments is the largest category of General Fund
disbursements and includes financial assistance to local governments and
not-for-profit corporations, as well as entitlement benefits to individuals. The
1998-99 Financial Plan projects spending of $25.14 billion in this category, an
increase of $1.88 billion or 8.1 percent over the prior year. The largest annual
increases are for educational Medicaid, other health and social welfare
programs, and community projects grants.
State operations spending reflects the administrative costs of operating
the State's agencies, including the prison system, mental hygiene institutions,
the State University system (SUNY), the Legislature, and the court system.
Personal service costs account for approximately 73 percent of spending in this
category. Since January 1995, the State's workforce has been reduced by about 10
percent and is projected to remain at its current level of approximately 191,000
persons in 1998-99.
State operations spending is projected at $6.70 billion, an increase of
$511 million or 8.3 percent the prior year. This increase is primarily due to an
additional payroll cycle in 1998- 99, a 3.5 percent general salary increase on
October 1, 1998 for most State employees, the loss of federal receipts that
would otherwise lower General Fund spending in mental hygiene programs, and a
projected 15.6 percent increase in the Judiciary's budget.
Disbursements in General State charges are estimated at $2.22 billion, a
decrease of $50 million from the prior year.
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Debt service paid from the General Fund reflects debt service on
short-term obligations of the State, and includes only interest costs on the
State's commercial paper program. The 1998-99 debt service estimate is $11
million, reflecting relative stability in short-term interest rates. The State's
short-term TRAN borrowing program was eliminated in 1995.
Transfers to other funds from the General Fund are made primarily to
finance certain portions of State capital projects spending and debt service on
long-term bonds where these costs are not funded from other sources. Transfers
in support of debt service are projected at $2.13 billion in 1998-99, an
increase of $110 million from 1997-98. The increase reflects the impact of
certain prior year bond sales (not of refunding savings), and certain bond sales
planned to occur during the 1998-99 fiscal year. The State Financial Plan also
establishes a transfer of $50 million to the new Debt Reduction Reserve Fund.
The Fund may be used, subject to enactment of new appropriations, to pay the
debt service costs on or to prepay State-supported bonds. Transfers in support
of capital projects provide General Fund support for projects not otherwise
financed through bond proceeds, dedicated taxes and other revenues, or federal
grants. These transfers are projected at $200 million for 1998-99, comparable to
last year. Remaining transfer's from the General Fund to other funds are
estimated to decline $59 million in 1998-99 to $327 million. This decline is
primarily the net impact of one-time transfers in 1997-98 to the State
University Tuition Stabilization Fund and to the Lottery Fund to support school
aid, offset by a 1998-99 increase in the State subsidy to the Roswell Park
Cancer Research Institute.
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type is expected to comprise approximately 41
percent of total governmental funds receipts in the 1998-99 fiscal year,
three-quarters of that activity relates to federally-funded programs.
Total disbursements for programs supported by Special Revenue Funds are
projected at $29.97 billion, an increase of $2.32 billion or 8.4 percent from
1997-98. Federal grants account for approximately three-quarters of all spending
in the Special Revenue fund type. Disbursements from federal funds are estimated
at $21.78 billion, an increase of $1.12 billion or 5.4 percent. The single
largest program in this fund group is Medicaid, which is projected at $13.65
billion, an increase of $465 million or 3.5 percent above last year. Federal
support for welfare programs is projected at $2.53 billion, similar to 1997-98.
The remaining
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growth in federal funds is primarily due to the new Child Health Plus program,
estimated at $197 million in 1998-99. This program will expand health insurance
coverage to children of indigent families.
State special revenue spending is projected to be $8.19 billion, an
increase of $1.20 billion or 17.2 percent from last year's levels. Most of this
projected increase in spending is due to the $704 million cost of the first
phase of the STAR program, as well as $231 million in additional operating
assistance for mass transportation, and $113 million for the State share of the
new Child Health Plus program.
Capital Projects Funds account for the financial resources used in the
acquisition, construction, or rehabilitation of major State capital facilities,
and for capital assistance grants to certain local governments or public
authorities. This fund type consists of the Capital Projects Fund, which is
supported by tax receipts transferred from the General Fund, and various other
capital funds established to distinguish specific capital construction purposes
supported by other revenues. In the 1998-99 fiscal year, activity in these funds
is expected to comprise 5.5 percent of total governmental receipts.
Capital Projects Funds spending in fiscal year 1998-99 is projected at
$4.14 billion, an increase of $575 million or 16.1 percent from last year. The
major components of this expected growth are transportation and environmental
programs, including continued increased spending for 19196 Clean Water/Clean Air
Bond Act projects and higher projected disbursements from the Environmental
Protection Fund (EPF). Another significant component of this projected increase
is in the area of public protection, primarily for facility rehabilitation and
construction of additional prison capacity.
State law requires the Governor to propose a balanced budget each year.
In recent years, the State has closed projected budget gaps of $5.0 billion
(1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1
billion (1998-99). The State, as a part of the 1998-99 Executive Budget
projections submitted to the Legislature in February 1998, projected a 1999- 00
General Fund budget gap of approximately $1.77 billion and a 2000-01 gap of $3.7
billion. As a result of changes made in the 1998-99 enacted budget, the 1999-00
gap is now expected to be roughly $1.3 billion, or about $400 million less than
previously projected, after application of reserves created as part of the
1998-99 budget process. Such reserves would not be available against subsequent
year imbalances.
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Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. However, the State's projections in 1999-00 currently assume actions
to achieve $600 million in lower disbursements and $250 million in additional
receipts from the settlement of State claims against the tobacco industry.
Consistent with past practice, the projections do not include any costs
associated with new collective bargaining agreements after the expiration of the
current round of contracts at the end of the 1998-99 fiscal year. The State
expects that the 1999-00 Financial Plan will achieve savings from initiatives by
State agencies to deliver services more efficiently, workforce management
efforts, maximization of federal and non-General Fund spending offsets, and
other actions necessary to bring projected disbursements and receipts into
balance.
The State will formally update its outyear projections of receipts and
disbursements for the 2000-01 and 2001-02 fiscal years as a part of the 1999-00
Executive Budget process, as required by law. The revised expectations for years
2000-01 and 2001-02 will reflect the cumulative impact of tax reductions and
spending commitments enacted over the last several years as well as new 1999-00
Executive Budget recommendations. The STAR program, which dedicates a portion of
personal income tax receipts fund school tax reductions, has a significant
impact on General Fund receipts. STAR is projected to reduce personal income tax
revenues available to the General Fund by an estimated $1.3 billion in 2000-01.
Measured from the 1998-99 base, scheduled reductions to estate and gift sales
and other taxes, reflecting tax cuts enacted in 1997-98 and 1998-99, will lower
General Fund taxes and fees by an estimated $1.8 billion in 2000- 01.
Disbursement projections for the outyears currently assume additional outlays
for school aid, Medicaid, welfare reform, mental health community reinvestment,
and other multi-year spending commitments in law.
The Division of the Budget believes that the economic assumptions and
projections of receipts and disbursements accompanying the 1998-99 Executive
Budget are reasonable. However, the economic and financial condition of the
State may be affected by various financial, social, economic and political
factors. Those factors can be very complex, can vary from fiscal year to fiscal
year, and are frequently the result of actions taken not only by the State but
by entities, such as the federal government, that are outside the State's
control. Because of the uncertainty and unpredictability of changes in these
factors, their impact cannot be fully included in the assumptions underlying the
State's projections. For example, there can be no assurance that the Legislature
will enact the Governor's
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proposals or that the State's actions will be sufficient to preserve budgetary
balance or to align recurring receipts and disbursements in either 1998-99 or in
future fiscal years.
Uncertainties with regard to the economy present the largest potential
risk to future budget balance in New York State. This risk includes either a
financial market or broader economic "correction" during the period, a risk
heightened by the relatively lengthy expansions currently underway. The
securities industry is more important to the New York economy than the national
economy, and a significant deterioration in stock market performance could
ultimately produce adverse changes in wage and employment levels. In addition, a
normal "forecast error" of one percentage point in the expected growth rate
could cumulatively raise or lower receipts by over $1 billion by the last year
of the 1998 through 2001 projection period. On the other hand, the national or
State economy may continue to perform better than projected, which could produce
beneficial short-term results in State receipts.
The State anticipates that its capital programs will be financed, in
part, through borrowings by the State and its public authorities in the 1998-99
fiscal year. The State expects to issue $528 million in general obligation bonds
(including $154 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The State also anticipates the
issuance of up to a total of $419 million in Certificates of Participation to
finance equipment purchases (including costs of issuance, reserve funds, and
other costs) during the 1998-99 fiscal year. Of this amount, it is anticipated
that approximately $191 million will be issued to finance agency equipment
acquisitions, including amounts to address Statewide technology issues related
to Year 2000 compliance. Approximately $228 million will also be issued to
finance equipment acquisitions for welfare reform-related information technology
systems.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. These factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. Because of the uncertainty and
unpredictability of these factors, their impact cannot, as a practical matter,
be included in the assumptions underlying the State's projections at this time.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal
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analysis and review of State and national economic forecasts prepared by
commercial forecasting services and other public and private forecasters.
Economic forecasts have frequently failed to predict accurately the timing and
magnitude of changes in the national and the State economies. Many uncertainties
exist in forecasts of both the national and State economies, including consumer
attitudes toward spending, the extent of corporate and governmental
restructuring, the condition of the financial sector, federal fiscal and
monetary policies, the level of interest rates, and the condition of the world
economy, which could have an adverse effect on the State. There can be no
assurance that the State economy will not experience results in the current
fiscal year that are worse than predicted, with corresponding material and
adverse effects on the State's projections of receipts and disbursements.
Projections of total State receipts in the Financial Plan are based on
the State tax structure n effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year collection
estimates for taxes that are based on a computation of annual liability, such as
the business and personal income taxes, are consistent with estimates of total
liability under such taxes.
Projections of total State disbursements are based on assumptions
relating to economic and demographic factors, levels of disbursements for
various services provided by local governments (where the cost is partially
reimbursed by the State), and the results of various administrative and
statutory mechanisms in controlling disbursements for State operations. Factors
that may affect the level of disbursements in the fiscal year include
uncertainties relating to the economy of the nation and the State, the policies
of the federal government, and changes in the demand for and use of State
services.
An additional risk to the State Financial Plan arises from the potential
impact of certain litigation and of federal disallowances now pending against
the State, which could adversely affect the State's projections of receipts and
disbursements. The State Financial Plan assumes no significant litigation or
federal disallowance or other federal actions that
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could affect State finances, but has significant reserves in the event of such
an action.
The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely from the projections set fort herein. In the past the
State has taken management actions to address potential Financial Plan
shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.
Despite recent budgetary surpluses recorded by the State, actions
affecting the level of receipts and disbursements, the relative strength of the
State and regional economy, and actions by the federal government have helped to
create projected structural budget gaps for the State. These gaps result from a
significant disparity between recurring revenues and the costs of maintaining or
increasing the level of support for State programs. To address a potential
imbalance in any given fiscal year, the State would be required to take actions
to increase receipts and/or reduce disbursements as it enacts the budget for
that year, and, under the State Constitution, the Governor is required to
propose a balanced budget each year. There can be no assurance, however, that
the Legislature will enact the Governor's proposals or that the State's actions
will be sufficient to preserve budgetary balance in a given fiscal year or to
align recurring receipts and disbursements in future fiscal years. For example,
the fiscal effects of tax reductions adopted in the last several fiscal years
(including 1998-99) are projected to grow more substantially beyond the 1998-99
fiscal year, with the incremental annual cost of all currently enacted tax
reductions estimated at over $4 billion by the time they are fully effective in
State fiscal year 2002-03. These actions will place pressure on future budget
balance in New York State.
New York State is currently addressing "Year 2000" data processing
compliance issues. The Year 2000 compliance issue ("Y2K") arises because most
computer software programs allocate two digits to the data field for "year" on
the assumption that the first two digits will be "19". Such programs will thus
interpret the year 2000 as the year 1900 absent reprogramming. Y2K could impact
both the ability to enter data into computer programs and the ability of such
programs to correctly process data. There can be no guarantee, however, that all
of the State's mission-critical and high-priority computer systems will be Year
2000 compliant and that there will not be an adverse impact upon State
operations or State finances as a result.
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Constitutional challenges to State laws have limited the amount of taxes
which political subdivisions can impose on real property. In 1979, the State's
highest court declared unconstitutional a State law allowing localities and
school districts to impose a special increase in real estate property taxes in
order to raise funds for pensions and other uses. Additional court actions have
been brought against the State, certain agencies and municipalities relating to
financing, the amount of real estate tax, the use of tax revenues and other
matters.
An additional risk to the 1998-99 State Financial Plan arises from the
potential impact of certain litigation now pending against the State, which
could produce adverse effects on the State's projections of receipts and
disbursements.
Certain litigation pending against the State, its subdivisions and their
officers and employees could have a substantial and long-term adverse effect on
State finances. The State is a party to numerous legal proceedings, many of
which normally recur in governmental operations. Because of the prospective
nature of these proceedings, no estimate of the potential loss can be made.
The State is a defendant in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws.
Included in the State's outstanding litigation are a number of cases
challenging the legality or the adequacy of a variety of significant social
welfare programs primarily involving the State's Medicaid and mental health
programs. Adverse judgments in these matters generally could result in
injunctive relief coupled with prospective changes in patient care which could
require substantial increased financing of the litigated programs in the future.
Because of the prospective nature of these matters, no provision for this
potential exposure has been made in the accompanying general purpose financial
statements.
Actions commenced by several Indian nations claim that significant
amounts of land were unconstitutionally taken from the Indians in violation of
various treaties and agreements during the eighteenth and nineteenth centuries.
The claimants seek recovery of approximately six million acres of land as well
as compensatory and punitive damages.
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In addition, the State is party to other claims and litigation which its
legal counsel has advised are not probable of adverse court decisions. Although
the amounts of potential losses, if any, are not presently determinable, it is
the State's opinion that its ultimate liability in these cases is not expected
to have a material adverse effect on the State's financial position.
The national economy has maintained a robust rate of growth during the
past six quarters as the expansion, which is well into its seventh year,
continues. Since early 1992, approximately 16-1/2 million jobs have been added
nationally. The State economy has also continued to expand, but growth remains
somewhat slower than in the nation. Although the State has added over 400,000
jobs since late 1992, employment growth in the State has been hindered during
recent years by significant cutbacks in the computer and instrument
manufacturing, utility, defense, and banking industries. Government downsizing
has also moderated these job gains.
The fiscal health of the State may also be affected by the fiscal health
of New York City (City), which continues to receive significant financial
assistance from the State. State aid contributes to the City's ability to
balance its budget and meet its cash requirements. The State may also be
affected by the ability of the City and certain entities issuing debt for the
benefit of the City to market their securities successfully in the public credit
markets.
The City has achieved balanced operating results for each of its fiscal
years since 1981 as measured by the GAAP standards in force at that time. The
City prepares a four-year financial plan (Financial Plan) annually and updates
it periodically, and prepares a comprehensive annual financial report describing
its most recent fiscal year each October.
Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The cities of Yonkers and Troy continue to
operate under State-ordered control agencies. The potential impact on the State
of any future requests by localities for additional oversight or financial
assistance is not included in the projections of the State's receipts and
disbursements for the State's 1998-99 fiscal year.
Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities, and twenty-eight municipalities received more than $32
million in
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targeted unrestricted aid in the 1997-98 budget. Both of these emergency aid
packages were largely continued through the 1998-99 budget. The State also
dispersed an additional $21 million among all cities, towns and villages after
enacting a 3.9 percent increase in General Purpose State Aid in 1997-98 and
continued this increase in 1998-99.
The 1998-99 budget includes an additional $29.4 million in unrestricted
aid targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve upstate
cities will receive $24.2 million in one-time assistance from a cash flow
acceleration of State aid.
The appropriation and allocation of general purpose local government aid
among localities, including New York City, is currently the subject of
investigation by a State commission. While the distribution of general purpose
local government aid was originally based on a statutory formula, in recent
years both the total amount appropriated and the amounts appropriated to
localities have been determined by the Legislature. A State commission was
established to study the distribution and amounts of general purpose local
government aid and recommend a new formula by June 30, 1999, which may change
the way aid is allocated.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1996, the total indebtedness of all
localities in the State other than New York City was approximately $20.0
billion. A small portion (approximately $77.2 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling State legislation. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
other than New York City that are authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.
Twenty-one localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1996.
Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the
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public credit markets, which may adversely affect the marketability of notes and
bonds issued by localities within the State. Localities may also face
unanticipated problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Other large-scale potential problems,
such as declining urban populations, increasing expenditures, and the loss of
skilled manufacturing jobs, may also adversely affect localities and necessitate
State assistance.
SPECIAL CONSIDERATIONS AFFECTING PUERTO RICO
The following highlights some of the more significant financial trends
and problems affecting the Commonwealth of Puerto Rico (the Commonwealth or
Puerto Rico) and is based on information drawn from official statements and
prospectuses relating to the securities offerings of Puerto Rico and its
agencies and instrumentalities. Such information, however, has not been
independently verified by the Trust.
The Government of Puerto Rico has established programs directed at
developing the manufacturing and service sectors (with emphasis on the tourism
industry) of the economy and expanding and modernizing the island's
infrastructure. Domestic and foreign investment has been stimulated by selective
tax exemption, development loans, and other financial and tax incentives.
Infrastructure expansion and modernization have been to a large extent financed
by bonds and notes issues by the Commonwealth, its public corporations and
municipalities. Economic progress has been aided by significant increases in the
levels of education and occupational skills of the island's population.
The economy of Puerto Rico is fully integrated with that of the United
States mainland. During fiscal 1997, approximately 88% of Puerto Rico's exports
went to the United States mainland, which was also the source of approximately
62% of Puerto Rico's imports. In fiscal 1997, Puerto Rico experienced a $2.7
billion positive adjusted merchandise trade balance.
The dominant sectors of the Puerto Rico economy are manufacturing and
services. The manufacturing sector has experienced a basis change over the years
as a result of increased emphasis on higher wage, high technology industries,
such as pharmaceuticals, electronics, computers, microprocessors, professional
and scientific instruments, and certain high technology machinery and equipment.
The services sector, including finance, insurance, real estate, wholesale and
retail trade, and hotel and related services, also plays a major role in
economy. It rates second only to manufacturing in contribution to the gross
domestic product and leads all sectors in providing
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employment. In recent years, the services sector has experienced significant
growth in response to the expansion of the manufacturing sector.
Puerto Rico's more than decade-long economic expansion continued
throughout the five-year period from fiscal 1993 through fiscal 1997. Almost
every sector of the economic participated and record levels of employment were
achieved. Factors behind this expansion included government-sponsored economic
development programs, periodic declines in the exchange value of the United
States dollar, increases in the level of federal transfers, and the relatively
low cost of borrowing.
Gross product in fiscal 1993 was $25.1 ($24.5 billion in 1992 prices) and
gross product in fiscal 1997 was $32.1 billion ($27.7 billion in 1992 prices).
This represents an increase in gross product of 27.7% from fiscal 1993 to 1997
(13.0% in 1992 prices).
Since fiscal 1985, personal income, both aggregate and per capita, has
increased consistently each fiscal year. In fiscal 1997, aggregate personal
income was $32.1 billion ($30.0 billion in 1992 prices) and personal income per
capita was $8,509 ($7,957 in 1992 prices).
Personal income includes transfer payments to individuals in Puerto Rico
under various social programs. Total federal payments to Puerto Rico, which
include transfers to local government entities and expenditures of federal
agencies in Puerto Rico, in addition to federal transfer payments to
individuals, are lower on a per capita basis in Puerto Rico than in any state.
Transfer payments to individuals in fiscal 1997 were $7.3 billion, of which $5.2
billion, or 71.6%, represented entitlements to individuals who had previously
performed services or made contributions under programs such as Social Security,
Veteran's Benefits, Medicare and U.S. Civil Service retirement pensions.
According to the Labor Department's Household Employment Survey, during
the first eight months of fiscal 1998, total employment increased 0.4% over the
same period in fiscal 1997. total monthly employment averaged 1,129,000 during
the first eight months of fiscal 1998, compared to 1,124,500 in the same period
of fiscal 1997. The seasonally adjusted unemployment rate for February 1998 was
14.1%.
The Planning Board's gross product forecast for fiscal 1998, made in
February 1998, projected an increase of 3.0% over fiscal 1997.
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Puerto Rico has a diversified economy. During the period between fiscal
1993 and 1997, the manufacturing and services sectors generated the largest
portion of gross domestic product. Three sectors of the economy provide the most
employment: manufacturing, services and government.
For many years, United States companies operating in Puerto Rico enjoyed
a special tax credit that was available under Section 936 of the Code.
Originally, the credit provided an effective 100% federal tax exemption for
operating and qualifying investment income from Puerto Rico sources. Amendments
to Section 936 made in 1993 instituted two alternative methods for calculating
the credit and limited the amount of the credit that a qualifying company could
claim. These limitations area based on a percentage of qualifying income and on
qualifying expenditures on wages, other wage related benefit and qualifying
expenditures. As a result of amendments incorporated in the Small Business Job
Protection Act of 1996 enacted by the United States Congress and signed into law
by President Clinton on August 20, 1996, the tax credit is now being phased out
over a ten-year period for existing claimants and is no longer available for
corporations that establish operations in Puerto Rico after October 13, 1995
(including existing Section 936 Corporations to the extent substantially new
operations are established in Puerto Rico), the 1996 Amendments also moved the
credit based on the economic activity limitation to Section 30A of the Code and
phased it out over 10 years. In addition, the 1996 Amendments eliminated the
credit previously available for income derived from certain qualified
investments in Puerto Rico.
During 1997, Governor Rossello proposed to Congress the enactment of a
new permanent federal incentive program similar to what is now provided under
Section 30A. Such program would provide U.S. companies a tax credit based on
qualifying wages paid and other wage related expenses, such as fringe benefits,
as well as depreciation expenses for certain tangible assets and research and
development expenses. Under the Governor's proposal, the credit granted to
qualifying companies would continue to effect until Puerto Rico shows, among
other things, substantial economic improvements in terms of certain economic
parameters. The fiscal 1998 budget submitted by President Clinton to Congress in
February 1997 included a proposal to modify Section 30A to (i) extend the
availability of the Section 30A Credit indefinitely, (ii) make it available to
companies establishing operations in Puerto Rico after October 13, 1995, and
(iii) eliminate the income cap. Although said proposal was not included in the
final fiscal 1998 federal budget, President Clinton's fiscal 1999 budget
submitted to Congress again included these modifications to Section 30A. While
the Government of Puerto Rico plans to continue lobbying for this proposal, it
is
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not possible at this time to predict whether the Section 30A Credit will be
modified.
It is not possible at this time to determine the long-term effect on the
Puerto Rico economy of the enactment of the 1996 Amendments. The Government of
Puerto does not believe there will be short-term or medium-term material adverse
effects on Puerto Rico's economy as a result of the enactment of the 1996
Amendment. The Government incentive programs to safeguard Puerto Rico's
competitive position.
Section 2 of Article VI of the Constitution of Puerto Rico provides that
direct obligations of the Commonwealth evidenced by full faith and credit bonds
or notes shall not be issued if the amount of the principal of and interest on
such bonds and notes and on all such bonds and notes theretofore issued which is
payable in any fiscal year, together with any amount paid by the Commonwealth in
the preceding fiscal year on account of bonds or notes guaranteed by the
Commonwealth, exceeds 15% of the average annual revenues raised under the
provisions of Commonwealth legislations and covered into the Treasury of Puerto
Rico in the two fiscal years proceeding the then current fiscal year. Section 2
of Article VI does not limit the amount of debt that the Commonwealth may
guarantee so long as the 15% limitation is not exceeded. Internal revenues
consist principally of income taxes, property taxes and excise taxes. Certain
revenues, such as federal excise taxes on offshore shipments of alcoholic
beverages and tobacco products and customs duties, which are collected by the
United States Government and returned to the Treasury of Puerto Rico, and motor
vehicle fuel taxes and license fees, which are allocated to the Highway
Authority, are not included as internal revenues for the purpose of calculating
the debt limit, although they may be available for the payment of debt service.
On February 26, 1997 legislation was introduced in the U.S. House of
Representatives proposing a mechanism to settle permanently the political
relationship between Puerto Rico and the United States, either through full
self-government (e.g., statehood or independence, including, as an alternative,
free association via a bilateral treaty) or continued commonwealth status. Under
the proposed legislation, failure to settle on full self-government after
completion of the referenda process provided therein would result in retention
of the current commonwealth status. On March 19, 1997, similar legislation was
introduced in the U.S. Senate. On March 4, 1998, the U.S. House of
Representatives voted in favor of the Political Status Act. It is not possible
at this time to predict, however, what course the legislation will follow in the
Senate, and whether it will be subsequently enacted into law.
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With respect to pending and threatened litigation, excluding the
litigation mentioned in the following paragraph, the Commonwealth has reported
liabilities of approximately $106 million for awarded and anticipated
unfavorable judgments. This amount was included as other long-term liabilities
in the general long-term debt account group and represents the amount estimated
as a probable liability or a liability with a fixed or expected due date which
will require future available financial resources for its payment. Management
believes that the ultimate liability in excess of amounts provided, if any,
would not be significant.
The Commonwealth and various component units are defendants in a lawsuit
alleging violations of civil rights. Preliminary hearings and discovery
proceedings are in progress. The amounts claimed exceed $50 billion; however,
the ultimate liability cannot be presently determined. It is the opinion of
management that the claim is excessive and exaggerated. No provision for any
liability that may result upon adjudication of this lawsuit has been recognized
in the financial statements by the Commonwealth.
On January 22, 1996, the US District Court in Puerto Rico consolidated
all cases against the Commonwealth related to the complaints filed in 1979 by
the inmates of the correctional facilities in Puerto Rico. The Court ruled a
permanent order requiring the Commonwealth to comply with the requirement of the
minimum fixed living space per inmate. In the opinion of management, based on
advice of their legal counsel, this order will limit the imposition of further
fines and the fines already paid together with the accrued liability the general
long-term debt account group, (which amount to approximately $200 million at
June 30, 1997) shall be sufficient to carry out the Court's requirement.
Each Fund has a separate investment objective or objectives which it
pursues through separate investment policies, as described in the Prospectus.
The following discussion elaborates on the presentation of the Money Market
Fund's investment policies contained in the Prospectus.
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS
The Funds may engage in the following investment practices or invest in
the following instruments to the extent permitted in the Prospectus and
elsewhere in this SAI.
TEMPORARY DEFENSIVE MEASURES
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In times of unusual or adverse market conditions - for temporary
defensive purposes - each fund, except for the Equity Index Fund, may invest
without limit in cash and cash equivalents.
Cash or cash equivalents which include, but are not limited to:
short-term obligations issued or guaranteed as to interest and principal by any
U.S. or foreign government or government agencies or instrumentality thereof
(including repurchase agreements collateralized by such securities); obligations
of banks (certificates of deposit, bankers' acceptances and time deposits) which
at the date of investment have capital, surplus, and undivided profits (as of
the date of their most recently published financial statements) in excess of
$100,000,000, and obligations of other banks or savings and loan associations if
such obligations are federally insured; commercial paper which at the date of
investment is rated A-1 by S&P or P-1 by Moody's or, if not rated, is issued or
guaranteed as to payment of principal and interest by companies which at the
date of investment have an outstanding debt issue rated AA or better by S&P or
Aa or better by Moody's; short-term corporate obligations which at the date of
investment are rated AA or better by S&P or Aa or better by Moody's; and other
debt instruments not specifically described if such instruments are deemed by
the Trustees to be of comparable high quality and liquidity.
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements with member banks of the
Federal Reserve System or member firms of the National Association of Securities
Dealers, Inc. that meet the repurchase agreement creditworthiness guidelines
established by the Trustees. The Equity Index Fund will enter into repurchase
agreements only with domestic banks with total assets in excess of one billion
dollars or primary government securities dealers reporting to the Federal
Reserve Bank of New York, and with respect to securities of the type in which
the Fund may invest. In addition, the Global High Yield Fund, International Bond
and International Equity Funds may enter into domestic or foreign repurchase
agreements with certain sellers deemed to be creditworthy pursuant to guidelines
adopted by the Trustees.
A repurchase agreement, which provides a means for a Fund to earn income
on uninvested cash for periods as short as overnight, is an arrangement under
which the purchaser (i.e., the Fund) purchases a U.S. government or other high
quality short-term debt obligation (the "Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time (usually not
more than a week in the case of the Equity Index
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Fund, California Tax Free Fund and New York Tax Free Fund) and price. Repurchase
agreements with foreign banks may be available with respect to government
securities of the particular foreign jurisdiction. The custody of the Obligation
will be maintained by the Fund's Custodian. The value of the purchased
securities, including any accrued interest, will at all times exceed the value
of the repurchase agreement. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Fund together with the repurchase price upon repurchase. In either case, the
income to the Fund is unrelated to the interest rate on the Obligation subject
to the repurchase agreement.
The income on repurchase agreements may be subject to federal and state
income taxes when distributed by a Fund as a dividend to shareholders. Subject
to applicable limitations, the Tax Free Bond Fund will enter into repurchase
agreements as a means of earning income on its cash reserves when, in the
judgment of the Sub-Adviser, shareholders would benefit more from receiving
taxable income thereon than from earning no income or tax-free income at a lower
rate on such reserves.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the Fund to the seller of the Obligation. It is not clear whether a
court would consider the Obligation purchased by the Fund subject to a
repurchase agreement as being owned by the Fund or as being collateral for a
loan by the Fund to the seller. In the event of the commencement of bankruptcy
or insolvency proceedings with respect to the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, the Fund may
encounter delays and incur costs before being able to sell the security. Delays
may involve loss of interest or decline in price of the Obligation. If the court
characterizes the transaction as a loan and the Fund has not perfected a
security interest in the Obligation, the Fund may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Fund would be at risk of losing some or
all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Funds, the Sub-Advisers seek to
minimize the risk of loss from repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the security. However, if the market
value of the Obligation subject to the repurchase agreement becomes less than
the repurchase price (including
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accrued interest), the Fund will direct the seller of the Obligation to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement equals or exceeds the repurchase price.
The Strategic Income Fund, Strategic Value Fund, California Tax Free Fund
and New York Tax Free Fund, Blue Chip Growth Fund, Research Value Fund, Small
Cap Value Fund, Growth Opportunities Fund, Small Cap Growth Fund, Equity Income
Fund and Global High Yield Fund may enter into reverse repurchase agreements. A
Fund will maintain a segregated account consisting of liquid assets to cover its
obligations under reverse repurchase agreements. Each of the California Tax Free
Fund and New York Tax Free Fund will limit its investments in reverse repurchase
agreements and other borrowing to no more than 10% of its total assets. Each of
the Strategic Income Fund, Strategic Value Fund, Blue Chip Growth Fund, Research
Value Fund, Small Cap Value Fund, Growth Opportunities Fund, Small Cap Growth
Fund, Equity Income Fund and Global High Yield Fund will limit its investments
in reverse repurchase agreements to no more than 5% of its total assets.
LENDING OF PORTFOLIO SECURITIES
Each Fund, except the Tax Free Bond Fund, MAP Equity Fund and the Money
Market Fund, may seek to increase its income by lending portfolio securities.
Under guidelines adopted by the Funds' Board, such loans may be made to
institutions, such as broker-dealers, and are required to be secured
continuously by collateral in cash or U.S. government securities maintained on a
current basis at an amount at least equal to the market value of the securities
loaned. The Fund would have the right to call a loan and obtain the securities
loaned at any time generally on less than five days' notice. For the duration of
a loan, the Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned and would also receive
compensation from the investment of the collateral. The Fund would not, however,
have the right to vote any securities having voting rights during the existence
of the loan, but the Fund would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving or withholding
of their consent on a material matter affecting the investment. The Trust, on
behalf of certain of the Funds, has entered into an agency agreement with
Merrill Lynch Portfolio Services, Inc. which acts as the Funds' agent in making
loans of portfolio securities and short-term money market investments of the
cash collateral received, under the supervision and control of the Funds'
Sub-Advisers.
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As with other extensions of credit there are risks of delay in recovery
of, or even loss of rights in, the collateral should the borrower of the
securities fail financially or breach its agreement with a Fund. However, the
loans would be made only to firms deemed by the Sub-Adviser to be creditworthy
and approved by the Board, and when, in the judgment of the Sub-Adviser, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. The value of securities loaned will not exceed 33%
of the value of the total assets of the lending Fund. In addition, pursuant to
guidelines adopted by the Board, each Fund is prohibited from lending more than
5% of its total assets to any one counterparty.
BANK OBLIGATIONS
Time deposits are nonnegotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by the Funds will not benefit from insurance from the
Bank Insurance Fund or the Savings Association Insurance Fund administered by
the Federal Deposit Insurance Corporation.
Certificates of deposit are certificates evidencing the obligation of a
bank to repay funds deposited with it for a specified period of time.
Bankers' acceptances are credit instruments evidencing the obligation of
a bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity.
Investments in the obligations of banks are deemed to be "cash
equivalents" if, at the date of investment, the banks have capital surplus and
individual profits (as of the date of their most recently published financials)
in excess of $100,000,000, or if, with respect to the obligations of other banks
and savings and loan associations, such obligations are federally insured. The
Equity Index Fund will not be subject to the above restriction to the extent it
invests in bank obligations of United States banks (including foreign branches)
which have more than $1 billion in total assets at the time of investment and
are members of the Federal Reserve System or are examined by the Comptroller of
the Currency or whose deposits are insured by the Federal Deposit Insurance
Corporation. The Equity Index Fund also may invest in certificates of deposit of
savings and loan
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associations (federally or state chartered and federally insured) having total
assets in excess of $1 billion.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have initial
maturities of one year or less; Treasury notes have initial maturities of one to
ten years; and Treasury bonds generally have initial maturities of greater than
ten years. Some obligations issued or guaranteed by U.S. government agencies and
instrumentalities, for example, Government National Mortgage Association
("GNMA") pass-through certificates, are supported by the full faith and credit
of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by
the right of the issuer to borrow from the Treasury; others, such as those
issued by the Federal National Mortgage Association ("FNMA"), by the
discretionary authority of the U.S. government to purchase certain obligations
of the agency or instrumentality; and others, such as those issued by the
Student Loan Marketing Association, only by the credit of the agency or
instrumentality. While the U.S. government provides financial support to such
U.S. government-sponsored agencies or instrumentalities, no assurance can be
given that it will always do so, and it is not so obligated by law. See
"Mortgage-Related and Other Asset-Backed Securities." The Equity Index Fund will
invest in such securities only when it is satisfied that the credit risk with
respect to the issuer is minimal.
DEBT SECURITIES
Debt securities may have fixed, variable or floating (including inverse
floating) rates of interest. To the extent that a Fund invests in debt
securities, it will be subject to certain risks. The value of the debt
securities held by a Fund, and thus the NAV of the shares of a Fund, generally
will fluctuate depending on a number of factors, including, among others,
changes in the perceived creditworthiness of the issuers of those securities,
movements in interest rates, the average maturity of a Fund's investments,
changes in relative values of the currencies in which a Fund's investments are
denominated relative to the U.S. dollar, and the extent to which a Fund hedges
its interest rate, credit and currency exchange rate risks. Generally, a rise in
interest rates will reduce the value of fixed income securities held by a Fund,
and a decline
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in interest rates will increase the value of fixed income securities held by a
Fund.
CONVERTIBLE SECURITIES
The Capital Appreciation Fund, Convertible Fund, High Yield Corporate
Bond Fund, International Bond Fund, International Equity Fund, Strategic Income
Fund, Strategic Value Fund, Total Return Fund, Value Fund, Blue Chip Growth
Fund, Research Value Fund, Small Cap Value Fund, Growth Opportunities Fund,
Small Cap Growth Fund, Equity Income Fund, MAP Equity Fund and Global High Yield
Fund may invest in securities convertible into common stock or the cash value of
a single equity security or a basket or index of equity securities. Such
investments may be made, for example, if the Sub-Adviser believes that a
company's convertible securities are undervalued in the market. Convertible
securities eligible for inclusion in the Funds' portfolios include convertible
bonds, convertible preferred stocks, warrants or notes or other debt instruments
that may be exchanged for cash payable in an amount that is linked to the value
of a particular security, basket of securities, index or indices of securities
or currencies.
Convertible securities, until converted, have the same general
characteristics as other fixed income securities insofar as they generally
provide a stable stream of income with generally higher yields than those of
equity securities of the same or similar issuers. By permitting the holder to
exchange his investment for common stock or the cash value of a security or a
basket or index of securities, convertible securities may also enable the
investor to benefit from increases in the market price of the underlying
securities. Therefore, convertible securities generally offer lower interest or
dividend yields than non-convertible securities of similar quality.
As with all fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. The unique feature of the convertible
security is that as the market price of the underlying common stock declines, a
convertible security tends to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the price
of a convertible security increasingly reflects the value of the underlying
common stock and may rise accordingly. While no securities investment is without
some risk, investments in
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convertible securities generally entail less risk than investments in the common
stock of the same issuer.
Holders of fixed income securities (including convertible securities)
have a claim on the assets of the issuer prior to the holders of common stock in
case of liquidation. However, convertible securities are typically subordinated
to similar non-convertible securities of the same issuer.
Accordingly, convertible securities have unique investment
characteristics because (i) they have relatively high yields as compared to
common stocks, (ii) they have defensive characteristics since they provide a
fixed return even if the market price of the underlying common stock declines,
and (iii) they provide the potential for capital appreciation if the market
price of the underlying common stock increases.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the charter provision or indenture pursuant to
which the convertible security is issued. If a convertible security held by a
Fund is called for redemption, the Fund will be required to surrender the
security for redemption, convert it into the underlying common stock or cash or
sell it to a third party.
ARBITRAGE
Each Fund, except the California Tax Free Fund, Equity Index Fund,
International Bond Fund, International Equity Fund, MAP Equity Fund, New York
Tax Free Fund and Tax Free Bond Fund, may sell in one market a security which it
owns and simultaneously purchase the same security in another market, or it may
buy a security in one market and simultaneously sell it in another market, in
order to take advantage of differences between the prices of the security in the
different markets. Although the Funds do not actively engage in arbitrage, such
transactions may be entered into only with respect to debt securities and will
occur only in a dealer's market where the buying and selling dealers involved
confirm their prices to the Fund at the time of the transaction, thus
eliminating any risk to the assets of a Fund.
FOREIGN SECURITIES
Except for the California Tax Free Fund, Government Fund, New York Tax
Free Fund and Tax Free Bond Fund, each Fund may invest in U.S.
dollar-denominated and non-dollar-denominated foreign debt and equity securities
and in certificates of deposit issued
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by foreign banks and foreign branches of U.S. banks. Under current SEC rules
relating to the use of the amortized cost method of portfolio securities
valuation, the Money Market Fund is restricted to purchasing U.S.
dollar-denominated securities, but it is not otherwise precluded from purchasing
securities of foreign issuers.
Investors should carefully consider the appropriateness of foreign
investing in light of their financial objectives and goals. While foreign
markets may present unique investment opportunities, foreign investing involves
risks not associated with domestic investing. Securities markets in other
countries are not always as efficient as those in the U.S. and are sometimes
less liquid and more volatile. Other risks involved in investing in the
securities of foreign issuers include differences in accounting, auditing and
financial reporting standards; limited publicly available information; the
difficulty of assessing economic trends in foreign countries; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); government interference, including
government ownership of companies in certain sectors, wage and price controls,
or imposition of trade barriers and other protectionist measures; difficulties
in invoking legal process abroad and enforcing contractual obligations;
political, social or economic instability which could affect U.S. investments in
foreign countries; and potential restrictions on the flow of international
capital. Additionally, foreign securities and dividends and interest payable on
those securities may be subject to foreign taxes, including foreign withholding
taxes, and other foreign taxes may apply with respect to securities
transactions. Additional costs associated with an investment in foreign
securities may include higher transaction, custody and foreign currency
conversion costs. In the event of litigation relating to a portfolio investment,
the Funds may encounter substantial difficulties in obtaining and enforcing
judgments against non-U.S. resident individuals and companies.
Investment in emerging market countries presents risks in greater degree
than, and in addition to, those presented by investment in foreign issuers in
general. Developing countries have economic structures that are less mature.
Furthermore, developing countries have less stable political systems and may
have high inflation, rapidly changing interest and currency exchange rates, and
their securities markets are substantially less developed. The economies of
developing countries generally
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are heavily dependent upon international trade, and, accordingly, have been and
may continue to be adversely affected by barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures in the
countries with which they trade. These economies also have been and may continue
to be adversely affected by economic conditions in the countries with which they
trade.
FOREIGN CURRENCY TRANSACTIONS
Many of the foreign securities in which the Funds invest will be
denominated in foreign currencies. Changes in foreign exchange rates will affect
the value of securities denominated or quoted in foreign currencies. Exchange
rate movements can be large and can endure for extended periods of time,
affecting either favorably or unfavorably the value of the Funds' assets.
However, each Fund, except the California Tax Free Fund, the Equity Index Fund,
the Government Fund, the Money Market Fund, the New York Tax Free Fund and the
Tax Free Bond Fund, may, to the extent it invests in foreign securities, enter
into forward foreign currency transactions in order to protect against
uncertainty in the level of future foreign currency exchange rates. Each of
these Funds may enter into contracts to purchase foreign currencies to protect
against an anticipated rise in the U.S. dollar price of securities it intends to
purchase and may enter into contracts to sell foreign currencies to protect
against the decline in value of its foreign currency-denominated portfolio
securities due to a decline in the value of the foreign currencies against the
U.S. dollar. In addition, a Fund may use one currency (or a basket of
currencies) to hedge against adverse changes in the value of another currency
(or a basket of currencies) when exchange rates between the two currencies are
correlated.
Foreign currency transactions in which the Funds may engage include
forward foreign currency contracts, currency exchange transactions on a spot
(i.e., cash) basis, put and call options on foreign currencies and foreign
exchange futures contracts. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days (usually less than one year) from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between traders (usually large commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions are charged at
any stage for trades. Although foreign exchange
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dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the spread) between the price at which they are buying and
selling various currencies.
Normally, consideration of the prospect for currency parities will be
incorporated in a longer term investment decision made with regard to overall
diversification strategies. However, the Sub-Adviser believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interest of a Fund will be served by entering into such
a contract. Generally, the Sub-Adviser believes that the best interest of a Fund
will be served if a Fund is permitted to enter into forward contracts under
specified circumstances. First, when a Fund enters into, or anticipates entering
into, a contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars, of the amount of foreign currency involved in the underlying
security transaction, a Fund will be able to insulate itself from a possible
loss resulting from a change in the relationship between the U.S. dollar and the
subject foreign currency during the period between the date on which the
security is purchased or sold and the date on which payment is made or received,
although a Fund would also forego any gain it might have realized had rates
moved in the opposite direction. This technique is sometimes referred to as a
"settlement" hedge or "transaction" hedge.
Second, when the Sub-Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of dollars, the amount
of foreign currency approximating the value of some or all of a Fund's portfolio
securities denominated in such foreign currency. Such a hedge (sometimes
referred to as a "position" hedge) will tend to offset both positive and
negative currency fluctuations, but will not offset changes in security values
caused by other factors. The Fund also may hedge the same position by using
another currency (or a basket of currencies) expected to perform in a manner
substantially similar to the hedged currency ("proxy hedge"). The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. With respect to positions that
constitute "transaction" or "position" hedges (including "proxy" hedges), a Fund
will not enter into forward
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contracts to sell currency or maintain a net exposure to such contracts if the
consummation of such contracts would obligate the Fund to deliver an amount of
foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency (or the related currency, in the case
of a "proxy" hedge).
Finally, a Fund may enter into forward contracts to shift its investment
exposure from one currency into another currency that is expected to perform
inversely with respect to the hedged currency relative to the U.S. dollar. This
type of strategy, sometimes known as a "cross-currency" hedge, will tend to
reduce or eliminate exposure to the currency that is sold, and increase exposure
to the currency that is purchased, much as if the Fund had sold a security
denominated in one currency and purchased an equivalent security denominated in
another. "Cross-currency" hedges protect against losses resulting from a decline
in the hedged currency, but will cause the Fund to assume the risk of
fluctuations in the value of the currency it purchases.
At the consummation of the forward contract, a Fund may either make
delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract obligating it
to purchase at the same maturity date the same amount of such foreign currency.
If a Fund chooses to make delivery of the foreign currency, it may be required
to obtain such currency for delivery through the sale of portfolio securities
denominated in such currency or through conversion of other assets of the Fund
into such currency. If a Fund engages in an offsetting transaction, the Fund
will realize a gain or a loss to the extent that there has been a change in
forward contract prices. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
A Fund's dealing in forward contracts will be limited to the transactions
described above. Of course, a Fund is not required to enter into such
transactions with regard to its foreign currency-denominated securities and will
not do so unless deemed appropriate by the Sub-Adviser. A Fund generally will
not enter into a forward contract with a term of greater than one year.
In cases of transactions which constitute "transaction" hedges, or
"position" hedges (including "proxy" hedges) or "cross-currency" hedges that
involve purchase and sale of two different foreign currencies directly through
the same foreign currency contract, a Fund may deem its forward currency hedge
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position to be covered by underlying Fund portfolio securities or may establish
a Segregated Account with its Custodian in an amount equal to the value of the
Fund's total assets committed to the consummation of the subject hedge. The
Segregated Account will consist of liquid assets. In the case of "anticipatory"
hedges and "cross-currency" hedges that involve the purchase and sale of two
different foreign currencies indirectly through separate forward currency
contracts, the Fund will establish a Segregated Account with its Custodian as
described above. In the event a Fund establishes a Segregated Account, the Fund
will mark-to-market the value of the assets in the Segregated Account. If the
value of the liquid assets placed in the Segregated Account declines, additional
liquid assets will be placed in the account by the Fund on a daily basis so that
the value of the account will equal the amount of the Fund's commitments with
respect to such contracts.
It should be realized that this method of protecting the value of a
Fund's portfolio securities against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
time. It also reduces any potential gain which may have otherwise occurred had
the currency value increased above the settlement price of the contract. The
Funds cannot assure that the techniques discussed above will be successful.
Successful use of forward contracts depends on the investment manager's skill in
analyzing and predicting relative currency values. Forward contracts alter a
Fund's exposure to currency exchange rate activity and could result in losses to
the Fund if currencies do not perform as investment managers anticipate. A Fund
may also incur significant costs when converting assets from one currency to
another. Contracts to sell foreign currency would limit any potential gain which
might be realized by a Fund if the value of the hedged currency increases.
The Sub-Adviser believes active currency management can be employed as an
overall portfolio risk management tool. For example, in their view, foreign
currency management can provide overall portfolio risk diversification when
combined with a portfolio of foreign securities, and the market risks of
investing in specific foreign markets can at times be reduced by currency
strategies which may not involve the currency in which the foreign security is
denominated.
A Fund's foreign currency transactions may be limited by the requirements
of Subchapter M of the Code for qualification as a regulated investment company.
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FOREIGN INDEX-LINKED INSTRUMENTS
As part of its investment program, and to maintain greater flexibility,
the International Bond Fund, International Equity Fund, Strategic Income Fund
and Global High Yield Fund may, subject to compliance with each Fund's
limitations applicable to its investment in debt securities, invest in
instruments issued by the U.S. or a foreign government or by private issuers
that return principal and/or pay interest to investors in amounts which are
linked to the level of a particular foreign index ("foreign index-linked
instruments"). Foreign index-linked instruments have the investment
characteristics of particular securities, securities indexes, futures contracts
or currencies. Such instruments may take a variety of forms, such as debt
instruments with interest or principal payments determined by reference to the
value of a currency or commodity at a future point in time.
A foreign index may be based upon the exchange rate of a particular
currency or currencies or the differential between two currencies, or the level
of interest rates in a particular country or countries, or the differential in
interest rates between particular countries. In the case of foreign index-
linked instruments linking the interest component to a foreign index, the amount
of interest payable will adjust periodically in response to changes in the level
of the foreign index during the term of the foreign index-linked instrument.
BRADY BONDS
Each of the Convertible Fund, High Yield Corporate Bond Fund,
International Bond Fund, Strategic Income Fund, Strategic Value Fund, Total
Return Fund and Global High Yield Fund may invest a portion of its assets in
Brady Bonds, which are securities created through the exchange of existing
commercial bank loans to sovereign entities for new obligations in connection
with debt restructurings. Brady Bonds may be collateralized or uncollateralized
and are issued in various currencies (primarily the U.S. dollar). Brady bonds
are not considered U.S. government securities.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal by U.S. Treasury zero coupon bonds having the same maturity
as the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by
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cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest payments
but generally are not collateralized. Brady Bonds are often viewed as having
three or four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute the
"residual risk").
Brady Bonds involve various risk factors including the history of
defaults with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds. There can be no assurance that Brady Bonds in
which the Fund may invest will not be subject to restructuring arrangements or
to requests for new credit, which may cause the Fund to suffer a loss of
interest or principal on any of its holdings.
MUNICIPAL SECURITIES
Municipal securities generally are understood to include debt obligations
issued by, or on behalf of, states, territories and possessions of the United
States and their political subdivisions, agencies and instrumentalities and the
District of Columbia, to obtain funds for various public purposes, including
construction of a wide range of public facilities, refunding of outstanding
obligations, payment of general operating expenses and extensions of loans to
public institutions and facilities. The yields on municipal securities depend
upon a variety of factors, including general economic and monetary conditions,
general money market conditions, general conditions of the municipal securities
market, the financial condition of the issuer, the size of a particular
offering, the maturity of the obligations offered and the rating of the issue or
issues. Municipal securities also may be subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy taxes. There
is also the possibility that, as a result of
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litigation or other conditions, the power or ability of any one or more issuers
to pay, when due, the principal of, and interest on, its or their municipal
securities may be materially and adversely affected.
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power for the payment of
principal and interest.
Revenue Anticipation Notes are issued in expectation of receipt of other
kinds of revenue, such as federal revenues. They, also, are usually general
obligations of the issuer.
Bond Anticipation Notes are normally issued to provide interim financial
assistance until long-term financing can be arranged. The long-term bonds then
provide funds for the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the FHA under the FNMA or GNMA.
Project Notes are instruments sold by the Department of Housing and Urban
Development ("HUD") but issued by a state or local housing agency to provide
financing for a variety of programs. They are backed by the full faith and
credit of the U.S. government, and generally carry a term of one year or less.
Short-Term Discount Notes (tax-exempt commercial paper) are short-term
(365 days or less) promissory notes issued by municipalities to supplement their
cash flow.
Municipal Bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds. Issuers of general
obligation bonds include states, counties, cities, towns and regional districts.
The proceeds of these obligations are used to fund a wide range of public
projects, including construction or improvement of schools, highways and roads,
and water and sewer systems. The basic security behind general obligation bonds
is the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest. The taxes that can be levied for the
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payment of debt service may be limited or unlimited as to the rate or amount of
special assessments.
A revenue bond is not secured by the full faith, credit and taxing power
of an issuer. Rather, the principal security for a revenue bond is generally the
net revenue derived from a particular facility, group of facilities or, in some
cases, the proceeds of a special excise or other specific revenue source.
Revenue bonds are issued to finance a wide variety of capital projects,
including: electric, gas, water, and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and hospitals.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund which may be used
to make principal and interest payments on the issuer's obligations. Housing
finance authorities have a wide range of security and credit enhancement
guarantees available to them, including partially or fully insured mortgages,
rent subsidized and/or collateralized mortgages, and/or the net revenues from
housing or other public projects. Some authorities are provided further security
in the form of a state's assurance (although without obligation) to make up
deficiencies in the debt service reserve fund.
An entire issue of Municipal Bonds may be purchased by one or a small
number of institutional investors such as the Funds. Thus, the issue may not be
said to be publicly offered. Unlike securities which must be registered under
the Securities Act of 1933 prior to offer and sale, unless an exemption from
such registration is available, Municipal Bonds which are not publicly offered
may nevertheless be readily marketable. A secondary market exists for Municipal
Bonds which were not publicly offered initially.
The Tax Free Bond Fund may invest more than 25% of its total assets in
Municipal Bonds the issuers of which are located in the same state and may
invest more than 25% of its total assets in Municipal Bonds the security of
which is derived from any one of the following categories: hospitals and health
facilities; turnpikes and toll roads; ports and airports; colleges and
universities; public housing authorities; general obligations of states and
localities; lease rental obligations of states and local authorities; state and
local housing finance authorities; municipal utilities systems; bonds that are
secured or backed by the Treasury or other U.S. government guaranteed
securities; or industrial development and pollution control bonds. There could
be economic, business or political developments which might affect all Municipal
Bonds of a similar type. However, the Fund
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believes that the most important consideration affecting risk is the quality of
Municipal Bonds.
The Tax Free Bond Fund may engage in short-term trading (selling
securities held for brief periods of time, usually less than three months) if
the Sub-Adviser believes that such transactions, net of costs including taxes,
if any, would improve the overall return on its portfolio. The needs of
different classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that the Fund will be able to take advantage of
them.
There are, in addition, a variety of hybrid and special types of
municipal obligations, such as municipal lease obligations, as well as numerous
differences in the security of Municipal Bonds both within and between the two
principal classifications described above. Municipal lease obligations are
municipal securities that may be supported by a lease or an installment purchase
contract issued by state and local government authorities to acquire funds to
obtain the use of a wide variety of equipment and facilities such as fire and
sanitation vehicles, computer equipment and other capital assets. These
obligations, which may be secured or unsecured, are not general obligations and
have evolved to make it possible for state and local governments to obtain the
use of property and equipment without meeting constitutional and statutory
requirements for the issuance of debt. Thus, municipal lease obligations have
special risks not normally associated with Municipal Bonds. These obligations
frequently contain "non-appropriation" clauses that provide that the
governmental issuer of the obligation has no obligation to make future payments
under the lease or contract unless money is appropriated for such purposes by
the legislative body on a yearly or other periodic basis. In addition to the
"nonappropriation" risk, many municipal lease obligations have not yet developed
the depth of marketability associated with Municipal Bonds; moreover, although
the obligations may be secured by the leased equipment, the disposition of the
equipment in the event of foreclosure might prove difficult. For the purpose of
each Fund's investment restrictions, the identification of the "issuer" of
Municipal Bonds which are not General Obligation Bonds is made by the
Sub-Adviser on the basis of the characteristics of the Municipal Bonds as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such Bonds.
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In order to limit certain of these risks, the California Tax Free Fund,
New York Tax Free Fund and Tax Free Bond Fund will not invest more than 10% (15%
in the case of the Strategic Income Fund) of its total assets in municipal lease
obligations that are illiquid (along with all other illiquid securities). The
liquidity of municipal lease obligations purchased by the Funds will be
determined pursuant to guidelines approved by the Board of Trustees. Factors
considered in making such determinations may include: the frequency of trades
and quotes for the obligation; the number of dealers willing to purchase or sell
the security and the number of other potential buyers; the willingness of
dealers to undertake to make a market in the security; the nature of marketplace
trades; the obligation's rating; and, if the security is unrated, the factors
generally considered by a rating agency.
There may be other types of municipal securities that become available
which are similar to the foregoing described municipal securities in which each
Fund may invest.
INCOME LEVEL AND CREDIT RISK Municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay, when due, principal or
interest on its or their municipal obligations may be materially affected.
Although the Funds' quality standards are designed to minimize the credit risk
of investing in Municipal Bonds, that risk cannot be entirely eliminated.
TAX CONSIDERATIONS With respect to the California Tax Free Fund, New York
Tax Free Fund and Tax Free Bond Fund, income derived by a Fund from taxable
investments, including but not limited to securities lending transactions,
repurchase transactions, options and futures transactions, and investments in
commercial paper, bankers' acceptances and certificates of deposit will be
taxable for federal, state and local income tax purposes when distributed to
shareholders. Income derived by a Fund from interest on direct obligations of
the U.S. government will be taxable for federal income tax purposes when
distributed to shareholders but, provided that the Fund meets the requirements
of state law and properly designates distributions
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to shareholders, such distributions may be excludable from income for state
personal income tax purposes. A portion of original issue discount relating to
stripped Municipal Bonds and their coupons may also be treated as taxable income
under certain circumstances.
The Tax Reform Act of 1986 ("TRA") limited the types and volume of
Municipal Bonds qualifying for the federal income tax exemption for interest,
and the Code treats tax-exempt interest on certain Municipal Bonds as a tax
preference item included in the alternative minimum tax base for corporate and
noncorporate shareholders. In addition, all tax-exempt interest may result in or
increase a corporation's liability under the corporate alternative minimum tax,
because a portion of the difference between corporate "adjusted current
earnings" and alternative minimum taxable income is treated as a tax preference
item. Further, an issuer's failure to comply with the detailed and numerous
requirements imposed by the Code after bonds have been issued may cause the
retroactive revocation of the tax-exempt status of certain Municipal Bonds after
their issuance. The Funds intend to monitor developments in the municipal bond
market to determine whether any defensive action should be taken.
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS
Industrial Development Bonds which pay tax-exempt interest are, in most
cases, revenue bonds and are issued by, or on behalf of, public authorities to
raise money to finance various privately operated facilities for business,
manufacturing, housing, sports, and pollution control. These bonds are also used
to finance public facilities such as airports, mass transit systems, ports, and
parking. The payment of the principal and interest on such bonds is solely
dependent on the ability of the facility's user to meet its financial
obligations and the pledge, if any, of the real and personal property so
financed as security for such payments. These bonds are generally not secured by
the taxing power of the municipality but are secured by the revenues of the
authority derived from payments by the industrial user.
Industrial Development and Pollution Control Bonds, although nominally
issued by municipal authorities, are generally not secured by the taxing power
of the municipality but are secured by the revenues of the authority derived
from payments by the industrial user. Industrial Development Bonds issued after
the effective date of the TRA, as well as certain other bonds, are now
classified as "private activity bonds." Some, but not all,
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private activity bonds issued after that date qualify to pay tax-exempt
interest.
VARIABLE RATE DEMAND NOTES ("VRDNS")
The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond
Fund may invest in tax-exempt obligations which contain a floating or variable
interest rate adjustment formula and an unconditional right of demand to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period prior to specified dates, generally at 30, 60, 90, 180 or 365-day
intervals. The interest rates are adjustable at various intervals to the
prevailing market rate for similar investments, such adjustment formula being
calculated to maintain the market value of the VRDN at approximately the par
value of the VRDN on the adjustment date. The adjustments are typically based
upon the prime rate of a bank or some other appropriate interest rate adjustment
index.
The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond
Fund may also invest in VRDNs in the form of participation interests
("Participating VRDNs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank ("Institution").
Participating VRDNs provide a Fund with a specified undivided interest (up to
100%) of the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDNs from the
Institution upon a specified number of days' notice, not to exceed seven days.
In addition, the Participating VRDN is backed up by an irrevocable letter of
credit or guaranty of the Institution. A Fund has an undivided interest in the
underlying obligation and thus participates on the same basis as the Institution
in such obligation, except that the Institution typically retains fees out of
the interest paid or the obligation for servicing the obligation, providing the
letter of credit and issuing the repurchase commitment.
FLOATING AND VARIABLE RATE SECURITIES
Floating and variable rate securities provide for a periodic adjustment
in the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be based
on an event, such as a change in the prime rate.
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The interest rate on a floating rate debt instrument ("floater") is a
variable rate which is tied to another interest rate, such as a money-market
index or Treasury bill rate. The interest rate on a floater resets periodically,
typically every six months. While, because of the interest rate reset feature,
floaters provide the Funds with a certain degree of protection against rises in
interest rates, the Funds will participate in any declines in interest rates as
well.
The interest rate on a leveraged inverse floating rate debt instrument
("inverse floater") resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Accordingly, the
duration of an inverse floater may exceed its stated final maturity. Certain
inverse floaters may be deemed to be illiquid securities for purposes of the
Funds' limitations on investments in such securities.
ZERO COUPON BONDS
The Funds, except the Equity Index Fund and MAP Equity Fund, may purchase
zero coupon bonds, which are debt obligations issued without any requirement for
the periodic payment of interest. Zero coupon bonds are issued at a significant
discount from face value. The discount approximates the total amount of interest
the bonds would accrue and compound over the period until maturity at a rate of
interest reflecting market rate at the time of issuance. Because interest on
zero coupon bonds is not distributed on a current basis but is, in effect,
compounded, zero coupon bonds tend to be subject to greater market risk than
interest paying securities of similar maturities. The discount represents
income, a portion of which the Funds must accrue and distribute every year even
though a Fund receives no payment on the investment in that year. Zero coupon
bonds tend to be more volatile than conventional debt securities.
STANDBY COMMITMENTS -- OBLIGATIONS WITH PUTS ATTACHED
The California Tax Free Fund, New York Tax Free Fund, Strategic Income
Fund and Tax Free Bond Fund may purchase municipal securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities.
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Although it is not a put option in the usual sense, such a right to resell is
commonly known as a "put" and is also referred to as a "standby commitment."
Each Fund may pay for a standby commitment either separately, in cash, or in the
form of a higher price for the securities which are acquired subject to the
standby commitment, thus increasing the cost of securities and reducing the
yield otherwise available from the same security. The Sub-Adviser understands
that the Internal Revenue Service (the "IRS") has issued a revenue ruling to the
effect that, under specified circumstances, a registered investment company will
be the owner of tax-exempt municipal obligations acquired subject to a put
option. The IRS has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The IRS has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the California Tax Free Fund, New
York Tax Free Fund and Tax Free Bond Fund intends to take the position that it
is the owner of any municipal obligations acquired subject to a standby
commitment and that tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt in its hands; however, no assurance can be given
that this position would prevail if challenged. In addition, there is no
assurance that standby commitments will be available to a Fund, nor has the
California Tax Free Fund, New York Tax Free Fund or Tax Free Bond Fund assumed
that such commitments would continue to be available under all market
conditions.
A standby commitment may not be used to affect a Fund's valuation of the
municipal security underlying the commitment. Any consideration paid by a Fund
for the standby commitment, whether paid in cash or by paying a premium for the
underlying security, which increases the cost of the security and reduces the
yield otherwise available from the same security, will be accounted for by the
Fund as unrealized depreciation until the standby commitment is exercised or has
expired.
WHEN-ISSUED SECURITIES
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The Funds may from time to time purchase securities on a "when-issued"
basis. Debt securities, including municipal bonds, are often issued in this
manner. The price of such securities, which may be expressed in yield terms, is
fixed at the time a commitment to purchase is made, but delivery of and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase (60 days for municipal
bonds and notes). During the period between purchase and settlement, no payment
is made by the Fund and no interest accrues to the Fund. To the extent that
assets of a Fund are held in cash pending the settlement of a purchase of
securities, that Fund would earn no income; however, it is the Trust's intention
that each Fund will be fully invested to the extent practicable and subject to
the policies stated herein. Although when-issued securities may be sold prior to
the settlement date, the Trust intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons.
At the time the Trust makes the commitment on behalf of a Fund to
purchase a security on a when-issued basis, it will record the transaction and
reflect the amount due and the value of the security in determining the Fund's
net asset value. The market value of the when-issued security may be more or
less than the purchase price payable at the settlement date. The Trustees do not
believe that a Fund's net asset value or income will be exposed to additional
risk by the purchase of securities on a when-issued basis. Each Fund will
establish a segregated account in which it will maintain liquid assets at least
equal in value to commitments for when-issued securities. Such segregated
securities either will mature or, if necessary, be sold on or before the
settlement date.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Each Fund may buy Mortgage-related securities. Mortgage-related
securities are interests in pools of residential or commercial mortgage loans or
leases, including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations (see "Mortgage Pass-Through Securities"). The Funds, to
the extent permitted in the Prospectus, may also invest in debt securities which
are secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities. Like other fixed-
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income securities, when interest rates rise, the value of a mortgage-related
security generally will decline; however, when interest rates are declining, the
value of a mortgage-related security with prepayment features may not increase
as much as other fixed-income securities.
MORTGAGE PASS-THROUGH SECURITIES Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, mortgage pass-through securities
provide a monthly payment which consists of both interest and principal
payments. In effect, these payments are a "pass-through" of the monthly payments
made by the individual borrowers on their residential mortgage loans, net of any
fees paid to the issuer or guarantor of such securities. Additional payments are
caused by repayments of principal resulting from the sale of the underlying
residential property, refinancing or foreclosure, net of fees or costs which may
be incurred. Some mortgage-related securities (such as securities issued by the
GNMA) are described as "modified pass-through." These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, at the scheduled payment dates regardless of whether or not
the mortgagor actually makes the payment. Some mortgage pass-through
certificates may include securities backed by adjustable-rate mortgages which
bear interest at a rate that will be adjusted periodically.
Early repayment of principal on mortgage pass-through securities (arising
from prepayments of principal due to sale of the underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose a Fund to a lower rate of return upon reinvestment of principal. Also, if
a security subject to prepayment has been purchased at a premium, in the event
of prepayment the value of the premium would be lost.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. government (in the case of
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. Government (in the case of securities guaranteed by FNMA or FHLMC,
which are supported only by the discretionary authority of the U.S. government
to purchase the agency's obligations).
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The principal governmental guarantor of mortgage-related securities is
the GNMA. GNMA is a wholly owned U.S. government corporation within the U.S.
Department of Housing and Urban Development ("HUD"). GNMA is authorized to
guarantee, with the full faith and credit of the U.S. government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of FHA-insured or VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. government) include the FNMA and the FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development
and acts as a government instrumentality under authority granted by Congress.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. government. FNMA is authorized to borrow from the U.S. Treasury to
meet its obligations.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation and acts as a government instrumentality under
authority granted by Congress. FHLMC was formerly owned by the twelve Federal
Home Loan Banks and is now owned entirely by private stockholders. FHLMC issues
Participation Certificates ("PCS") which represent interests in conventional
mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment
of interest and collection of principal, but PCS are not backed by the full
faith and credit of the U.S. government.
If either fixed or variable rate pass-through securities issued by the
U.S. government or its agencies or instrumentalities are developed in the
future, the Funds reserve the right to invest in them.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in
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addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance and letters of credit. The insurance and guarantees are issued
by governmental entities, private insurers and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security meets the Funds'
investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements. The Funds may buy mortgage-related securities without
insurance or guarantees if, through an examination of the loan experience and
practices of the originator/servicers and poolers, the Sub-Adviser determines
that the securities meet the Funds' quality standards.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES The mortgage-related
securities in which the Funds may invest may be: (i) privately issued securities
which are collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) privately issued securities which
are collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; and (iii) other privately issued securities in which
the proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an agency or
instrumentality of the U.S. government.
The MAP Equity Fund California Tax Free Fund, New York Tax Free Fund and
Equity Index Fund, however, may not invest in non-government mortgage
pass-through securities. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. No Fund will purchase mortgage-related securities or any
other assets which in the Sub-Advisers' opinion are illiquid if, as a result,
more than 10% (15% in the case of the International Equity, International Bond,
Strategic Income and Strategic Value Funds) of the value of the Fund's total
assets will be illiquid.
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COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Interest and prepaid
principal is paid, in most cases, semiannually. CMOs may be collateralized by
whole mortgage loans, but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA and their
income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs are structured into multiple
classes, each bearing a different stated maturity - actual maturing and average
life will depend upon the prepayment experience of the collateral. CMOs provide
for a modified form of call protection through a de facto breakdown of the
underlying pool of mortgages according to how quickly the loans are repaid.
Monthly payment of principal received from the pool of underlying mortgages,
including prepayments, is first returned to investors holding the shortest
maturity class. Investors holding the longer maturity classes receive principal
only after the first class has been retired. An investor is partially guarded
against a sooner than desired return of principal because of the sequential
payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond Offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B or C Bond
currently being paid off. When the Series A, B and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
The eligible Funds will not invest in any privately issued CMOs that do
not meet the requirements of Rule 3a-7 under the 1940 Act if, as a result of
such investment, more than 5% of a Fund's net assets would be invested in any
one CMO, more than 10% of the Fund's net assets would be invested in CMOs and
other investment company securities in the aggregate, or the Fund would hold
more than 3% of any outstanding issue of CMOs.
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FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCS, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCS. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
OTHER MORTGAGE-RELATED SECURITIES Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities, and may be structured in classes with rights to receive varying
proportions of principal and interest. Other mortgage-related securities may be
equity or debt securities issued by agencies or instrumentalities of the U.S.
government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
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CMO RESIDUALS CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Stripped
Mortgage-Backed Securities." In addition, if a series of a CMO includes a class
that bears interest at an adjustable rate, the yield to maturity on the related
CMO residual will also be extremely sensitive to changes in the level of the
index upon which interest rate adjustments are based. As described below with
respect to stripped mortgage-backed securities, in certain circumstances a
portfolio may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and, accordingly, CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to a
Fund's limitations on investment in illiquid securities.
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Under certain circumstances, a Fund's investment in residual interests in
"real estate mortgage investment conduits" ("REMICs") may cause shareholders of
that Fund to be deemed to have taxable income in addition to their Fund
dividends and distributions and such income may not be eligible to be reduced
for tax purposes by certain deductible amounts, including net operating loss
deductions. In addition, in some cases, the Fund may be required to pay taxes on
certain amounts deemed to be earned from a REMIC residual. Prospective investors
may wish to consult their tax advisors regarding REMIC residual investments by a
Fund.
CMOs and REMICs may offer a higher yield than U.S. government securities,
but they may also be subject to greater price fluctuation and credit risk. In
addition, CMOs and REMICs typically will be issued in a variety of classes or
series, which have different maturities and are retired in sequence. Privately
issued CMOs and REMICs are not government securities nor are they supported in
any way by any governmental agency or instrumentality. In the event of a default
by an issuer of a CMO or a REMIC, there is no assurance that the collateral
securing such CMO or REMIC will be sufficient to pay principal and interest. It
is possible that there will be limited opportunities for trading CMOs and REMICs
in the over-the-counter market, the depth and liquidity of which will vary from
time to time. Holders of "residual" interests in REMICs (including the Fund)
could be required to recognize potential phantom income, as could shareholders
(including unrelated business taxable income for tax-exempt shareholders) of
funds that hold such interests. The Fund will consider this rule in determining
whether to invest in residual interests.
GOVERNMENT FUND The Government Fund may invest in securities
collateralized by mortgages or pools of mortgages the issuer of which has
qualified to be treated as a "REMIC". CMOs and REMICs may offer a higher yield
than U.S. government securities, but they may also be subject to greater price
fluctuation and credit risk. In addition, CMOs and REMICs typically will be
issued in a variety of classes or series, which have different maturities and
are retired in sequence. Privately issued CMOs and REMICs are not government
securities nor are they supported in any way by any governmental agency or
instrumentality. In the event of a default by an issuer of a CMO or a REMIC,
there is no assurance that the collateral securing such CMO or REMIC will be
sufficient to pay principal and interest. It is possible that there will be
limited opportunities for trading CMOs and REMICs in the over-the-counter
market, the depth and liquidity of which will
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vary from issue to issue and from time to time. Holders of "residual" interests
in REMICs (including the Fund) could be required to recognize potential phantom
income, as could shareholders (including unrelated business taxable income for
tax-exempt shareholders) of funds that hold such interests. The Government Fund
will consider this rule in determining whether to invest in residual interests.
STRIPPED MORTGAGE-BACKED SECURITIES Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on a Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
RISKS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES The value of some
mortgage-backed securities in which the Funds may invest may be particularly
sensitive to changes in prevailing interest rates, and, like the other
investments of the Funds, the ability
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of a Fund to successfully utilize these instruments may depend in part upon the
ability of an Sub-Adviser to forecast interest rates and other economic factors
correctly. If a Sub-Adviser incorrectly forecasts such factors and has taken a
position in mortgage-backed securities that is or becomes contrary to prevailing
market trends, the Funds could be exposed to the risk of a loss.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the chance that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise their prepayment options at a time when it is least
advantageous to investors, generally prepaying mortgages as interest rates fall,
and slowing payments as interest rates rise. Besides the effect of prevailing
interest rates, the rate of prepayment and refinancing of mortgages may also be
affected by home value appreciation, ease of the refinancing process and local
economic conditions.
Market risk reflects the chance that the price of the security may
fluctuate over time. The price of mortgage-backed securities may be particularly
sensitive to prevailing interest rates, the length of time the security is
expected to be outstanding, and the liquidity of the issue. In a period of
unstable interest rates, there may be decreased demand for certain types of
mortgage-backed securities, and a Fund invested in such securities and wishing
to sell them may find it difficult to find a buyer, which may in turn decrease
the price at which they may be sold.
Credit risk reflects the chance that a Fund may not receive all or part
of its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
OTHER ASSET-BACKED SECURITIES Several types of asset-backed securities
have already been offered to investors, including CARSSM ("Certificates for
Automobile ReceivablesSM"). CARSSM represent undivided fractional interests in a
trust ("trust") whose assets consist of a pool of motor vehicle retail
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installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARSSM are passed-through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the trust. An investor's return
on CARSSM may be affected by early prepayment of principal on the underlying
vehicle sales contracts. If the letter of credit is exhausted, the trust may be
prevented from realizing the full amount due on a sales contract because of
state law requirements and restrictions relating to foreclosure sales of
vehicles and the obtaining of deficiency judgments following such sales or
because of depreciation, damage or loss of a vehicle, the application of federal
and state bankruptcy and insolvency laws, or other factors. As a result,
certificate holders may experience delays in payments or losses if the letter of
credit is exhausted.
The Sub-Advisers expect that other asset-backed securities (unrelated to
mortgage loans) will be offered to investors in the future. Consistent with its
investment objectives and policies, a Fund also may invest in other types of
asset-backed securities.
SHORT SALES AGAINST THE BOX
A short sale is a transaction in which a Fund sells through a broker a
security it does not own in anticipation of a possible decline in market price.
A short sale "against the box" is a short sale in which, at the time of the
short sale, a Fund owns or has the right to obtain securities equivalent in kind
and amount. Each of the Funds will only enter into short sales against the box.
A Fund may enter into a short sale against the box among other reasons, to hedge
against a possible market decline in the value of the security owned by the
Fund. If the value of a security sold short against the box increases, the Fund
would suffer a loss when it purchases or delivers to the selling broker the
security sold short. The proceeds of the short sale are retained by the broker
pursuant to applicable margin rules. In addition, the Fund may segregate assets,
equal in value to 50% of the value of the short sale, in a special account with
the Fund's custodian. The segregated assets are pledged to the broker pursuant
to applicable margin rules. If a broker with which the Fund has open short
sales, were to become bankrupt, a Fund could experience losses or delays in
recovering gains on short sales. The Funds will only enter into short sales
against the box with brokers the Sub-Advisers believe are
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creditworthy. Short sales against the box will be limited to no more than 25% of
a Fund's total assets. The MAP Equity Fund may not enter into short sales
against the box.
OPTIONS ON SECURITIES
WRITING CALL OPTIONS Any Fund, except the MAP Equity Fund, the Money
Market Fund and the Tax Free Bond Fund, may sell ("write") covered call options
on the portfolio securities of such Fund in an attempt to enhance investment
performance. The California Tax Free Fund and New York Tax Free Fund may
purchase and sell both put and call options on debt securities in standardized
contracts traded on national securities exchanges, boards of trade, or similar
entities, or quoted on NASDAQ, and agreements, sometimes called "cash puts,"
which may accompany the purchase of a new issue of bonds from a dealer. A call
option sold by a Fund is a short-term contract, having a duration of nine months
or less, which gives the purchaser of the option the right to buy, and imposes
on the writer of the option--in return for a premium received--the obligation to
sell, the underlying security at the exercise price upon the exercise of the
option at any time prior to the expiration date, regardless of the market price
of the security during the option period. A call option may be covered by, among
other things, the writer owning the underlying security throughout the option
period, or by holding, on a share-for-share basis, a call on the same security
as the call written, where the exercise price of the call held is equal to or
less than the price of the call written, or greater than the exercise price of a
call written if the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian.
A Fund will write covered call options both to reduce the risks
associated with certain of its investments and to increase total investment
return through the receipt of premiums. In return for the premium income, the
Fund will give up the opportunity to profit from an increase in the market price
of the underlying security above the exercise price so long as its obligations
under the contract continue, except insofar as the premium represents a profit.
Moreover, in writing the call option, the Fund will retain the risk of loss
should the price of the security decline, which loss the premium is intended to
offset in whole or in part. A Fund, in writing call options, must assume that
the call may be exercised at any time prior to the expiration of its obligations
as a writer, and that in such circumstances the net proceeds realized from the
sale of the underlying securities pursuant to the call may be substantially
below the prevailing market price. Covered call options and the securities
underlying such options will be listed on national
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securities exchanges, except for certain transactions in options on debt
securities and foreign securities.
During the option period, the covered call writer has, in return for the
premium received on the option, given up the opportunity to profit from a price
increase in the underlying securities above the exercise price, but, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline.
A Fund may protect itself from further losses due to a decline in value
of the underlying security or from the loss of ability to profit from
appreciation by buying an identical option, in which case the purchase cost may
offset the premium. In order to do this, the Fund makes a "closing purchase
transaction"--the purchase of a call option on the same security with the same
exercise price and expiration date as the covered call option which it has
previously written on any particular security. The Fund will realize a gain or
loss from a closing purchase transaction if the amount paid to purchase a call
option in a closing transaction is less or more than the amount received from
the sale of the covered call option. Also, because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the closing out of a call option is
likely to be offset in whole or in part by unrealized appreciation of the
underlying security owned by the Fund. When a security is to be sold from the
Fund's portfolio, the Fund will first effect a closing purchase transaction so
as to close out any existing covered call option on that security.
A closing purchase transaction may be made only on a national or foreign
securities exchange (an "Exchange") which provides a secondary market for an
option with the same exercise price and expiration date, except as discussed
below. There is no assurance that a liquid secondary market on an Exchange or
otherwise will exist for any particular option, or at any particular time, and
for some options no secondary market on an Exchange or otherwise may exist. If
the Fund is unable to effect a closing purchase transaction involving an
exchange-traded option, the Fund will not sell the underlying security until the
option expires or the Fund delivers the underlying security upon exercise. A
closing purchase transaction for an over-the-counter option may be made only
with the other party to the option. Once an option writer has received an
exercise notice, it cannot effect a closing purchase transaction in order to
terminate its obligation under the option and must deliver or purchase the
underlying securities at the exercise price.
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Each Fund pays brokerage commissions and dealer spreads in connection
with writing covered call options and effecting closing purchase transactions,
as well as for purchases and sales of underlying securities. The writing of
covered call options could result in significant increases in a Fund's portfolio
turnover rate, especially during periods when market prices of the underlying
securities appreciate. Subject to the limitation that all call and put option
writing transactions be covered, the Funds may, to the extent determined
appropriate by the Sub- Advisers, engage without limitation in the writing of
options on U.S. government securities. Subject to the limitation that all call
and put option writing transactions be covered, and limitations imposed on
regulated investment companies under federal tax law, the International Bond
Fund, International Equity Fund and Global High Yield Fund may, to the extent
determined appropriate by the Sub-Adviser, engage without limitation in the
writing of options on their portfolio securities.
WRITING PUT OPTIONS Each Fund, except the Money Market Fund, the MAP
Equity Fund and the Tax Free Bond Fund, may also write covered put options. Put
options written by a Fund are agreements by a Fund, for a premium received by
the Fund, to purchase specified securities at a specified price if the option is
exercised during the option period. A put option written by the Fund is
"covered" if the Fund maintains liquid assets with a value equal to the exercise
price in a segregated account with its custodian. A put option is also "covered"
if the Fund holds on a share-for-share basis a put on the same security as the
put written, where the exercise price of the put held is equal to or greater
than the exercise price of the put written, or less than the exercise price of
the put written if the difference is maintained by the Fund in liquid assets in
a segregated account with its custodian.
The premium which the Funds receive from writing a put option will
reflect, among other things, the current market price of the underlying
security, the relationship of the exercise price to such market price, the
historical price volatility of the underlying security, the option period,
supply and demand and interest rates.
A covered put writer assumes the risk that the market price for the
underlying security will fall below the exercise price, in which case the writer
could be required to purchase the security at a higher price than the
then-current market price of the security. In both cases, the writer has no
control over the
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time when it may be required to fulfill its obligation as a writer of the
option.
The Funds may effect a closing purchase transaction to realize a profit
on an outstanding put option or to prevent an outstanding put option from being
exercised. The Funds also may effect a closing purchase transaction, in the case
of a put option, to permit the Funds to maintain their holdings of the deposited
U.S. Treasury obligations, to write another put option to the extent that the
exercise price thereof is secured by the deposited U.S. Treasury obligations, or
to utilize the proceeds from the sale of such obligations to make other
investments.
If a Fund is able to enter into a closing purchase transaction, the Fund
will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option respectively. After writing a put option, the Fund may incur a loss equal
to the difference between the exercise price of the option and the sum of the
market value of the underlying security plus the premium received from the sale
of the option.
In addition, the Funds may also write straddles (combinations of covered
puts and calls on the same underlying security). The extent to which the Funds
may write covered put and call options and enter into so-called "straddle"
transactions involving put or call options may be limited by the requirements of
the Internal Revenue Code of 1986, as amended (the "Code") for qualification as
a regulated investment company and the Trust's intention that each Fund qualify
as such. Subject to the limitation that all call and put option writing
transactions be covered, the Funds may, to the extent determined appropriate by
the Sub-Advisers, engage without limitation in the writing of options on U.S.
government securities.
PURCHASING OPTIONS Each Fund, except Money Market Fund and the Tax Free
Bond Fund, may purchase put or call options which are traded on an Exchange or
in the over-the-counter market. Options traded in the over-the-counter market
may not be as actively traded as those listed on an Exchange. Accordingly, it
may be more difficult to value such options and to be assured that they can be
closed out at any time. The Funds will engage in such transactions only with
firms the Sub-Advisers deem to be of sufficient creditworthiness so as to
minimize these risks.
The Funds may purchase put options on securities to protect their
holdings in an underlying or related security against a
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substantial decline in market value. Securities are considered related if their
price movements generally correlate with one another. A Fund would buy a put
option in anticipation of a decline in the market value of such securities. The
purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell a security at a specified price upon exercise of the option during
the option period. The purchase of put options on securities held in the
portfolio or related to such securities will enable a Fund to preserve, at least
partially, unrealized gains occurring prior to the purchase of the option on a
portfolio security without actually selling the security. In addition, the Fund
will continue to receive interest or dividend income on the security. The put
options purchased by the Fund may include, but are not limited to, "protective
puts" in which the security to be sold is identical or substantially identical
to a security already held by the Fund or to a security which the Fund has the
right to purchase. The Fund would ordinarily recognize a gain if the value of
the securities decreased during the option period below the exercise price
sufficiently to cover the premium. The Fund would recognize a loss if the value
of the securities remained above the difference between the exercise price and
the premium.
The Funds may also purchase call options on securities the Funds intend
to purchase to protect against substantial increases in prices of such
securities pending their ability to invest in an orderly manner in such
securities. The purchase of a call option would entitle the Fund, in exchange
for the premium paid, to purchase a security at a specified price upon exercise
of the option during the option period. The Fund would ordinarily realize a gain
if the value of the securities increased during the option period above the
exercise price sufficiently to cover the premium. The Fund would have a loss if
the value of the securities remained below the sum of the premium and the
exercise price during the option period. In order to terminate an option
position, the Funds may sell put or call options identical to those previously
purchased, which could result in a net gain or loss depending on whether the
amount received on the sale is more or less than the premium and other
transaction costs paid on the put or call option when it was purchased.
MARRIED PUTS. Each Fund, except the Equity Index Fund, MAP Equity Fund,
Money Market Fund and Tax Free Bond Fund may engage in a strategy known as
"married puts." This strategy is most typically used when the Fund owns a
particular common stock or security convertible into common stock and wishes to
effect a short sale against the box (see "Short Sales Against the Box") but for
various reasons is
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unable to do so. The Fund may then enter into a series of stock and related
option transactions to achieve the economic equivalent of a short sale against
the box. To implement this trading strategy, the Fund will simultaneously
execute with the same broker a purchase of shares of the common stock and an "in
the money" over-the-counter put option to sell the common stock to the broker
and generally will write an over-the-counter "out of the money" call option in
the same stock with the same exercise price as the put option. The options are
linked and may not be exercised, transferred or terminated independently of the
other.
Holding the put option places the Fund in a position to profit on the
decline in price of the security just as it would by effecting a short sale and
to, thereby, hedge against possible losses in the value of a security or
convertible security held by the Fund. The writer of the put option may require
that the Fund write a call option, which would enable the broker to profit in
the event the price of the stock rises above the exercise price of the call
option (see "Writing Call Options" above). In the event the stock price were to
increase above the strike or exercise price of the option, the Fund would suffer
a loss unless it first terminated the call by exercising the put.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON SECURITIES Exchange markets in
U.S. government securities options are a relatively new and untested concept,
and it is impossible to predict the amount of trading interest that may exist in
such options. The same types of risk apply to over-the-counter trading in
options. There can be no assurance that viable markets will develop or continue
in the United States or abroad.
A Fund's purpose in selling covered options is to realize greater income
than would be realized on portfolio securities transactions alone. A Fund may
forego the benefits of appreciation on securities sold pursuant to call options,
or pay a higher price for securities acquired pursuant to put options written by
the Fund. If a put or call option purchased by a Fund is not sold when it has
remaining value, and if the market price of the underlying security, in the case
of a put, remains equal to or greater than the exercise price, or, in the case
of a call, remains less than or equal to the exercise price, the Fund will not
be able to exercise profitably the option and will lose its entire investment in
the option. Also, the price of a put or call option purchased to hedge against
price movements in a related security may move more or less than the price of
the related security. The Capital Appreciation Fund, Convertible
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Fund, Government Fund, High Yield Corporate Bond Fund, Money Market Fund, Total
Return Fund and Value Fund will not purchase a put or call option if, as a
result, the amount of premiums paid for all put and call options then
outstanding would exceed 10% of the value of the Fund's total assets.
The Fund would ordinarily realize a gain if the value of the securities
increased during the option period above the exercise price sufficiently to
cover the premium. The Fund would have a loss if the value of the securities
remained below the sum of the premium paid and the exercise price during the
option period. The ability of a Fund to successfully utilize options may depend
in part upon the ability of the Sub-Adviser to forecast interest rates and other
economic factors correctly.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets.
OPTIONS ON FOREIGN CURRENCIES
Each Fund, except the California Tax Free Fund, the Equity Index Fund,
the Government Fund, the MAP Equity Fund, the Money Market Fund, the New York
Tax Free Fund and the Tax Free Bond Fund, may, to the extent that it invests in
foreign securities, purchase and write options on foreign currencies. A Fund may
use foreign currency options contracts for various reasons, including: to manage
its exposure to changes in currency exchange rates; as an efficient means of
adjusting its overall exposure to certain currencies; or in an effort to enhance
its return.
A Fund may purchase and write put and call options on foreign currencies
for the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the U.S. dollar cost of foreign
securities to be acquired. A Fund may also use foreign currency options to
protect against potential losses in positions denominated in one foreign
currency against another foreign currency in which the Fund's assets are or may
be denominated. For example, a decline in the dollar value of a foreign currency
in which portfolio securities are denominated will reduce the dollar value of
such securities, even if their value in the foreign currency remains constant.
In order to protect against such declines in the value of portfolio securities,
a Fund may purchase put options on the
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foreign currency. If the value of the currency does decline, that Fund will have
the right to sell such currency for a fixed amount of dollars which exceeds the
market value of such currency, resulting in a gain that may offset, in whole or
in part, the negative effect of currency depreciation on the value of the Fund's
securities denominated in that currency.
Conversely, if a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Fund may purchase call options on such currency. If
the value of such currency does increase, the purchase of such call options
would enable the Fund to purchase currency for a fixed amount of dollars which
is less than the market value of such currency, resulting in a gain that may
offset, at least partially, the effect of any currency-related increase in the
price of securities the Fund intends to acquire. As in the case of other types
of options transactions, however, the benefit a Fund derives from purchasing
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, if currency exchange rates do not move
in the direction or to the extent anticipated, a Fund could sustain losses on
transactions in foreign currency options which would deprive it of a portion or
all of the benefits of advantageous changes in such rates.
If a Fund anticipates a decline in the dollar value of foreign
currency-denominated securities due to declining exchange rates, it could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received by the Fund.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, a Fund
could write a put option on the relevant currency. If rates move in the manner
projected, the put option will expire unexercised and allow the Fund to offset
such increased cost up to the amount of the premium. As in the case of other
types of options transactions, however, the writing of a foreign currency option
will constitute only a partial hedge up to the amount of the premium, and only
if rates move in the expected direction. If unanticipated exchange rate
fluctuations occur, the option may be exercised and a Fund would be required to
purchase or sell the underlying currency at a loss which may not be fully offset
by the amount of the premium. As a result of writing options on foreign
currencies, a Fund also may be
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required to forgo all or a portion of the benefits which might otherwise have
been obtained from favorable movements in currency exchange rates.
A call option written on foreign currency by a Fund is "covered" if that
Fund owns the underlying foreign currency subject to the call or securities
denominated in that currency or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if a Fund holds a call on the same foreign currency for
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the amount of the
difference is maintained by a Fund in liquid assets in a segregated account with
its custodian.
Options on foreign currencies to be written or purchased by a Fund will
be traded on U.S. and foreign exchanges or over-the-counter. Exchange-traded
options generally settle in cash, whereas options traded over-the counter may
settle in cash or result in delivery of the underlying currency upon exercise of
the option. As with other kinds of options transactions, however, the writing of
an option on foreign currency will constitute only a partial hedge up to the
amount of the premium received and a Fund could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations, although, in the event of rate movements
adverse to a Fund's position, a Fund may forfeit the entire amount of the
premium plus related transaction costs.
A Fund also may use foreign currency options to protect against potential
losses in positions denominated in one foreign currency against another foreign
currency in which the Fund's assets are or may be denominated. There can be no
assurance that a liquid market will exist when a Fund seeks to close out an
option position. Furthermore, if trading restrictions or suspensions are imposed
on the options markets, a Fund may be unable to close out a position.
Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of a Fund to reduce foreign currency
risk using such options. Over-the-
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counter options differ from traded options in that they are two- party contracts
with price and other terms negotiated between buyer and seller and generally do
not have as much market liquidity as exchanged-traded options. Foreign currency
exchange-traded options generally settle in cash, whereas options traded
over-the-counter may settle in cash or result in delivery of the underlying
currency upon exercise of the option.
SECURITIES INDEX OPTIONS
The Funds, except the MAP Equity Fund, may purchase call and put options
on securities indexes (only call options on the S&P 500 Composite Price Index in
the case of the Equity Index Fund) for the purpose of hedging against the risk
of unfavorable price movements which may adversely affect the value of a Fund's
securities. The Equity Index Fund may purchase call options on the S&P 500 Index
to protect against increases in the prices of securities underlying the Index
that the Equity Index Fund intends to purchase pending its ability to invest in
such securities in an orderly manner.
Unlike a securities option, which gives the holder the right to purchase
or sell specified securities at a specified price, an option on a securities
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (I) the difference between the value of the underlying securities index
on the exercise date and the exercise price of the option, multiplied by (ii) a
fixed "index multiplier." In exchange for undertaking the obligation to make
such a cash payment, the writer of the securities index option receives a
premium.
A securities index fluctuates with changes in the market values of the
securities included in the index. For example, some securities index options are
based on a broad market index such as the S&P 500 Composite Price Index or the
N.Y.S.E. Composite Index, or a narrower market index such as the S&P 100 Index.
Indexes may also be based on an industry or market segment such as the AMEX Oil
and Gas Index or the Computer and Business Equipment Index. Options on stock
indexes are traded on the following exchanges, among others: The Chicago Board
Options Exchange, New York Stock Exchange, and American Stock Exchange.
The effectiveness of hedging through the purchase of securities index
options will depend upon the extent to which price movements in the portion of
the securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities held or to be acquired by a Fund will not exactly
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match the securities represented in the securities indexes on which options are
based. In addition, the purchase of securities index options involves
essentially the same risks as the purchase of options on futures contracts. The
principal risk is that the premium and transaction costs paid by a Fund in
purchasing an option will be lost as a result of unanticipated movements in
prices of the securities comprising the securities index on which the option is
based. Gains or losses on a Fund's transactions in securities index options
depend on price movements in the securities market generally (or, for narrow
market indexes, in a particular industry or segment of the market) rather than
the price movements of individual securities held by a Fund. In this respect,
purchasing a securities index put (or call) option is analogous to the purchase
of a put (or call) on a securities index futures contract.
A Fund may sell securities index options prior to expiration in order to
close out its positions in securities index options which it has purchased. A
Fund may also allow options to expire unexercised.
FUTURES TRANSACTIONS
The California Tax Free Fund, Convertible Fund, Government Fund, High
Yield Corporate Bond Fund, International Bond Fund, International Equity Fund,
New York Tax Free Fund, Strategic Income Fund, Strategic Value Fund, Tax Free
Bond Fund, Total Return Fund, Equity Income Fund and Global High Yield Fund may
purchase and sell futures contracts on debt securities and on indexes of debt
securities in order to attempt to protect against the effects of adverse changes
in interest rates, to lengthen or shorten the average maturity or duration of a
Fund's portfolio and for other appropriate risk management purposes. For
example, a Fund may purchase futures contracts as a substitute for the purchase
of longer-term debt securities to lengthen the average duration of a Fund's
portfolio of fixed-income securities. The Government Fund may enter into futures
contracts and purchase and write options on futures, which are not U.S.
government securities, in order to attempt to hedge against changes in interest
rates and to seek current income. Such futures contracts would obligate the Fund
to make or take delivery of certain debt securities or an amount of cash upon
expiration of the futures contract, although most futures positions typically
are closed out through an offsetting transaction prior to expiration. The
Capital Appreciation Fund, Convertible Fund, Equity Index Fund, International
Equity Fund, Strategic Income Fund, Strategic Value Fund, Total Return Fund,
Value Fund, Blue
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Chip Growth Fund, Research Value Fund, Small Cap Value Fund, Growth
Opportunities Fund, Small Cap Growth Fund, Equity Income Fund, MAP Equity Fund
and Global High Yield Fund may purchase and sell stock index futures to hedge
the equity portion of those Funds' securities portfolios with regard to market
(systematic) risk (involving the market's assessment of overall economic
prospects), as distinguished from stock-specific risk (involving the market's
evaluation of the merits of the issuer of a particular security). These Funds,
and the International Bond Fund, may also purchase and sell other futures when
deemed appropriate, in order to hedge the equity or non-equity portions of their
portfolios. In addition, each Fund, except the California Tax Free Fund, Equity
Index Fund, Government Fund, Money Market Fund, New York Tax Free Fund and Tax
Free Bond Fund may, to the extent it invests in foreign securities, enter into
contracts for the future delivery of foreign currencies to hedge against changes
in currency exchange rates. Each of the Funds may also purchase and write put
and call options on futures contracts of the type into which such Fund is
authorized to enter and may engage in related closing transactions. In the
United States, all such futures on debt securities, debt index futures, stock
index futures, foreign currency futures and related options will be traded on
exchanges that are regulated by the Commodity Futures Trading Commission
("CFTC"). Subject to applicable CFTC rules, the Funds also may enter into
futures contracts traded on the following foreign futures exchanges: Frankfurt,
Tokyo, London and Paris, as long as trading on the aforesaid foreign futures
exchanges does not subject a Fund to risks that are materially greater than the
risks associated with trading on U.S. exchanges. The International Bond Fund,
International Equity Fund, Blue Chip Growth Fund, Research Value Fund, Small Cap
Value Fund, Growth Opportunities Fund, Small Cap Growth Fund, Equity Income Fund
and Global High Yield Fund are not limited to the above-listed exchanges.
A futures contract is an agreement to buy or sell a security or currency
(or to deliver a final cash settlement price in the case of a contract relating
to an index or otherwise not calling for physical delivery at the end of trading
in the contracts), for a set price at a future date. When interest rates are
changing and portfolio values are falling, futures contracts can offset a
decline in the value of a Fund's current portfolio securities. When interest
rates are changing and portfolio values are rising, the purchase of futures
contracts can secure better effective rates or purchase prices for the Fund than
might later be available in the market when the Fund makes anticipated
purchases. In the United States, futures contracts are traded on boards of trade
which have been designated "contract markets" by
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the CFTC. Currently, there are futures contracts based on a variety of
instruments, indexes and currencies, including long-term U.S. Treasury bonds,
Treasury notes, GNMA certificates, three-month U.S. Treasury bills, three-month
domestic bank certificates of deposit, a municipal bond index and various stock
indexes.
When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of liquid assets ("initial margin"). The margin required for a
futures contract is set by the exchange on which the contract is traded and may
be modified during the term of the contract. The initial margin is in the nature
of a performance bond or good faith deposit on the futures contract which is
returned to the Fund upon termination of the contract assuming all contractual
obligations have been satisfied. Each Fund expects to earn interest income on
its initial margin deposits. A futures contract held by a Fund is valued daily
at the official settlement price of the exchange on which it is traded. Each day
the Fund pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking-to-market." Variation margin does not represent a borrowing or loan by
a Fund but is instead a settlement between the Fund and the broker of the amount
one would owe the other if the futures contract expired. In computing daily net
asset value, each Fund will mark-to-market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.
Positions taken in the futures markets are not normally held until
delivery or final cash settlement is required, but are instead liquidated
through offsetting transactions which may result in a gain or a loss. While
futures positions taken by a Fund will usually be liquidated in this manner, the
Fund may instead make or take delivery of underlying securities or currencies
whenever it appears economically advantageous to the Fund to do so. A clearing
organization associated with the exchange on which futures are traded assumes
responsibility for closing-out transactions and guarantees that as between the
clearing members of an exchange, the sale and purchase obligations will be
performed with regard to all positions that remain open at the termination of
the contract.
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FUTURES ON DEBT SECURITIES A futures contract on a debt security is a
binding contractual commitment which, if held to maturity, will result in an
obligation to make or accept delivery, during a particular future month, of
securities having a standardized face value and rate of return. By purchasing
futures on debt securities--assuming a "long" position--a Fund will legally
obligate itself to accept the future delivery of the underlying security and pay
the agreed-upon price. By selling futures on debt securities--assuming a "short"
position--it will legally obligate itself to make the future delivery of the
security against payment of the agreed-upon price. Open futures positions on
debt securities will be valued at the most recent settlement price, unless such
price does not appear to the Sub- Advisers to reflect the fair value of the
contract, in which case the positions will be valued by or under the direction
of the Trustees.
Hedging by use of futures on debt securities seeks to establish, more
certainly than would otherwise be possible, the effective rate of return on
portfolio securities. A Fund may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Fund (or securities having characteristics similar to those held by
the Fund) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Fund's portfolio securities. When
hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position.
On other occasions, a Fund may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the Fund
intends to purchase particular securities and it has the necessary cash, but
expects the rate of return available in the securities markets at that time to
be less favorable than rates currently available in the futures markets. If the
anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Fund of purchasing
the securities will be offset, at least to some extent, by the rise in the value
of the futures position taken in anticipation of the subsequent securities
purchase. A Fund may also purchase futures contracts as a substitute for the
purchase of longer-term securities to lengthen the average duration of the
Fund's portfolio.
The Fund could accomplish similar results by selling securities with long
maturities and investing in securities with
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short maturities when interest rates are expected to increase or by buying
securities with long maturities and selling securities with short maturities
when interest rates are expected to decline. However, by using futures contracts
as a risk management technique, given the greater liquidity in the futures
market than in the cash market, it may be possible to accomplish the same result
more easily and more quickly.
Because the only futures contracts currently available to hedge the Tax
Free Bond Fund's portfolio of municipal obligations are futures on various U.S.
government securities and futures on a municipal securities index, perfect
correlation between that Fund's futures positions and portfolio positions may be
difficult to achieve.
SECURITIES INDEX FUTURES A securities index futures contract does not
require the physical delivery of securities, but merely provides for profits and
losses resulting from changes in the market value of the contract to be credited
or debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the contract is based. A stock
index is designed to reflect overall price trends in the market for equity
securities.
Stock index futures may be used to hedge the equity portion of a Fund's
securities portfolio with regard to market (systematic) risk, as distinguished
from stock-specific risk. The Funds may enter into stock index futures to the
extent that they have equity securities in their portfolios. Similarly, the
Funds may enter into futures on debt securities indexes (including the municipal
bond index) to the extent they have debt securities in their portfolios. By
establishing an appropriate "short" position in securities index futures, a Fund
may seek to protect the value of its portfolio against an overall decline in the
market for securities. Alternatively, in anticipation of a generally rising
market, a Fund can seek to avoid losing the benefit of apparently low current
prices by establishing a "long" position in securities index futures and later
liquidating that position as particular securities are in fact acquired. To the
extent that these hedging strategies are successful, the Fund will be affected
to a lesser degree by adverse overall market price movements, unrelated to the
merits of specific portfolio securities, than would otherwise be the case. A
Fund may also
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purchase futures on debt securities or indexes as a substitute for the purchase
of longer-term debt securities to lengthen the average duration of the Fund's
debt portfolio.
The Funds do not intend to use U.S. stock index futures to hedge
positions in securities of non-U.S. companies.
CURRENCY FUTURES A sale of a currency futures contract creates an
obligation by a Fund, as seller, to deliver the amount of currency called for in
the contract at a specified future time for a specified price. A purchase of a
currency futures contract creates an obligation by a Fund, as purchaser, to take
delivery of an amount of currency at a specified future time at a specified
price. A Fund may sell a currency futures contract, if the Sub-Adviser
anticipates that exchange rates for a particular currency will fall, as a hedge
against a decline in the value of the Fund's securities denominated in such
currency. If the Sub- Adviser anticipates that exchange rates will rise, the
Fund may purchase a currency futures contract to protect against an increase in
the price of securities denominated in a particular currency the Fund intends to
purchase. Although the terms of currency futures contracts specify actual
delivery or receipt, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the currency.
Closing out of a currency futures contract is effected by entering into an
offsetting purchase or sale transaction. To offset a currency futures contract
sold by a Fund, the Fund purchases a currency futures contract for the same
aggregate amount of currency and delivery date. If the price in the sale exceeds
the price in the offsetting purchase, the Fund is immediately paid the
difference. Similarly, to close out a currency futures contract purchased by the
Fund, the Fund sells a currency futures contract. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the offsetting sale
price is less than the purchase price, the Fund realizes a loss.
A risk in employing currency futures contracts to protect against the
price volatility of portfolio securities denominated in a particular currency is
that changes in currency exchange rates or in the value of the futures position
may correlate imperfectly with changes in the cash prices of a Fund's
securities. The degree of correlation may be distorted by the fact that the
currency futures market may be dominated by short-term traders seeking to profit
from changes in exchange rates. This would reduce the value of such contracts
for hedging purposes over a short-term period. Such distortions are
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generally minor and would diminish as the contract approached maturity. Another
risk is that the Sub-Adviser could be incorrect in its expectation as to the
direction or extent of various exchange rate movements or the time span within
which the movements take place.
OPTIONS ON FUTURES For bona fide hedging and other appropriate risk
management purposes, the Funds also may purchase and write call and put options
on futures contracts which are traded on exchanges that are licensed and
regulated by the CFTC for the purpose of options trading, or, subject to
applicable CFTC rules, on foreign exchanges. It is the current policy of the
Trust that the Funds will purchase or write only options on futures contracts
that are traded on a U.S. or foreign exchange or board of trade. The Funds also
may engage in related closing transactions with respect to options on futures. A
"call" option on a futures contract gives the purchaser the right, in return for
the premium paid, to purchase a futures contract (assume a "long" position) at a
specified exercise price at any time before the option expires. A "put" option
gives the purchaser the right, in return for the premium paid, to sell a futures
contract (assume a "short" position), for a specified exercise price at any time
before the option expires.
Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
futures market. When an entity exercises an option and assumes a "long" futures
position, in the case of a "call," or a "short" futures position, in the case of
a "put," its gain will be credited to its futures margin account, while the loss
suffered by the writer of the option will be debited to its account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the writer or holder of an option will usually realize a gain or loss
by buying or selling an offsetting option at a market price that will reflect an
increase or a decrease from the premium originally paid.
Options on futures contracts can be used by a Fund to hedge substantially
the same risks and for the same duration and risk
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management purposes as might be addressed or served by the direct purchase or
sale of the underlying futures contracts. If the Fund purchases an option on a
futures contract, it may obtain benefits similar to those that would result if
it held the futures position itself.
The purchase of put options on futures contracts is a means of hedging a
Fund's portfolio against the risk of rising interest rates, declining securities
prices or declining exchange rates for a particular currency. The purchase of a
call option on a futures contract represents a means of hedging against a market
advance affecting securities prices or currency exchange rates when the Fund is
not fully invested or of lengthening the average maturity or duration of a
Fund's portfolio. Depending on the pricing of the option compared to either the
futures contract upon which it is based or upon the price of the underlying
securities or currencies, it may or may not be less risky than ownership of the
futures contract or underlying securities or currencies.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Fund will not be subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in the
value of its portfolio securities or the currencies in which such securities are
denominated that would have been more completely offset if the hedge had been
effected through the use of futures.
If a Fund writes options on futures contracts, the Fund will receive a
premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Fund will realize a gain in the
amount of the premium, which may partially offset unfavorable changes in the
value of securities held by or to be acquired for the Fund. If the option is
exercised, the Fund will incur a loss in the option transaction, which will be
reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities or the
currencies in which such securities are denominated.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the underlying securities or the currencies in
which such securities are
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denominated. If the futures price at expiration is below the exercise price, the
Fund will retain the full amount of the option premium, which provides a partial
hedge against any decline that may have occurred in the Fund's holdings of
securities or the currencies in which such securities are denominated.
The writing of a put option on a futures contract is analogous to the
purchase of a futures contract. For example, if the Fund writes a put option on
a futures contract on debt securities related to securities that the Fund
expects to acquire and the market price of such securities increases, the net
cost to a Fund of the debt securities acquired by it will be reduced by the
amount of the option premium received. Of course, if market prices have
declined, the Fund's purchase price upon exercise may be greater than the price
at which the debt securities might be purchased in the securities market.
While the holder or writer of an option on a futures contract may
normally terminate its position by selling or purchasing an offsetting option of
the same series, a Fund's ability to establish and close out options positions
at fairly established prices will be subject to the maintenance of a liquid
market. The Funds will not purchase or write options on futures contracts unless
the market for such options has sufficient liquidity such that the risks
associated with such options transactions are not at unacceptable levels.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS In general, the Funds will engage in transactions in futures
contracts and related options only for bona fide hedging and other appropriate
risk management purposes, and not for speculation. With respect to positions in
futures and related options that do not constitute bona fide hedging positions,
a Fund will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Fund's total assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
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When purchasing a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amounts deposited with a futures commission merchant as margin, are equal
to the market value of the futures contract. Alternatively, the Fund may "cover"
its position by purchasing a put option on the same futures contract with a
strike price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the Fund
may "cover" its position by owning the instruments underlying the contract (or,
in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's custodian).
When selling a call option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) liquid assets that,
when added to the amounts deposited with a futures commission merchant as
margin, equal the total market value of the futures contract underlying the call
option. Alternatively, the Fund may cover its position by entering into a long
position in the same futures contract at a price no higher than the strike price
of the call option, by owning the instruments underlying the futures contract,
or by holding a separate call option permitting the Fund to purchase the same
futures contract at a price not higher than the strike price of the call option
sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) liquid assets that
equal the purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
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The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures, futures options or
forward contracts. See "Tax Status."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no guarantee
that there will be a correlation between price movements in the hedging vehicle
and in the Fund's securities being hedged. In addition, there are significant
differences between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to achieve
its objectives. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for futures and
futures options on securities, including technical influences in futures trading
and futures options, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends. It is also possible that, when a Fund has sold stock index futures
to hedge its portfolio against a decline in the market, the market may advance
while the value of the particular securities held in the Fund's portfolio may
decline. If this occurred, the Fund would incur a loss on the futures contracts
and also experience a decline in the value of its portfolio securities.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no
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trading, thereby preventing prompt liquidation of positions and subjecting some
holders of futures contracts to substantial losses.
In addition to the risks that apply to all options transactions, there
are several special risks relating to options on futures contracts. The ability
to establish and close out positions in such options will be subject to the
development and maintenance of a liquid market in the options. It is not certain
that such a market will develop. Although the Funds generally will purchase only
those options and futures contracts for which there appears to be an active
market, there is no assurance that a liquid market on an exchange will exist for
any particular option or futures contract at any particular time. In the event
no such market exists for particular options, it might not be possible to effect
closing transactions in such options with the result that a Fund would have to
exercise options it has purchased in order to realize any profit and would be
less able to limit its exposure to losses on options it has written.
Many of the contracts discussed above are relatively new instruments
without a significant trading history. As a result, there can be no assurance
that an active secondary market will develop or continue to exist. If the price
of a futures contract changes more than the price of the securities or
currencies, the Fund will experience either a loss or a gain on the futures
contracts which will not be completely offset by changes in the price of the
securities or currencies which are the subject of the hedge. In addition, it is
not possible to hedge fully or perfectly against currency fluctuations affecting
the value of securities denominated in foreign currencies because the value of
such securities is likely to fluctuate as a result of independent factors not
related to currency fluctuations.
SWAP AGREEMENTS
The International Bond Fund, International Equity Fund, Strategic Value
Fund, Strategic Income Fund, Blue Chip Growth Fund, Research Value Fund, Small
Cap Value Fund, Growth Opportunities Fund, Small Cap Growth Fund, Equity Income
Fund and Global High Yield Fund may enter into interest rate,
index and currency exchange rate swap agreements for purposes of attempting to
obtain a particular desired return at a lower cost to the Fund than if the Fund
had invested directly in an instrument that yielded that desired return or for
other portfolio management purposes. Swap agreements are two
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party contracts entered into primarily by institutional investors for periods
ranging from a few weeks to more than one year. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between the parties
are calculated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. The "notional amount" of the swap agreement is
only a fictive basis on which to calculate the obligations which the parties to
a swap agreement have agreed to exchange. Commonly used swap agreements include
interest rate caps, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates exceed a specified
rate, or "cap"; interest rate floors, under which, in return for a premium, one
party agrees to make payments to the other to the extent that interest rates
fall below a specified level, or "floor"; and interest rate collars, under which
a party sells a cap and purchases a floor or vice versa in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels. A Fund's obligations (or rights) under a swap agreement will generally
be equal only to the net amount to be paid or received under the agreement based
on the relative values of the positions held by each party to the agreement (the
"net amount"). A Fund's obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of liquid assets to avoid any potential leveraging
of the Fund's portfolio. A Fund will not enter into a swap agreement with any
single party if the net amount owed or to be received under existing contracts
with that party would exceed 5% of the Fund's assets.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the Sub- Adviser's ability correctly to
predict whether certain types of investments are likely to produce greater
returns than other investments. Because they are two party contracts and because
they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty. The Sub-Adviser will cause a Fund
to
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enter into swap agreements only with counterparties that would be eligible for
consideration as repurchase agreement counterparties under the Fund's repurchase
agreement guidelines. Certain restrictions imposed on the Funds by the Code may
limit the Funds' ability to use swap agreements. The swaps market is a
relatively new market and is largely unregulated. It is possible that
developments in the swaps market, including potential government regulation,
could adversely affect a Fund's ability to terminate existing swap agreements or
to realize amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC.
To qualify for this exemption, a swap agreement must be entered into by
"eligible participants," which include the following, provided the participants'
total assets exceed established levels: a bank or trust company, savings
association or credit union, insurance company, investment company subject to
regulation under the 1940 Act, commodity pool, corporation, partnership,
proprietorship, organization, trust or other entity, employee benefit plan,
governmental entity, broker-dealer, futures commission merchant, natural person,
or regulated foreign person. To be eligible, natural persons and most other
entities must have total assets exceeding $10 million; commodity pools and
employee benefit plans must have assets exceeding $5 million. In addition, an
eligible swap transaction must meet three conditions. First, the swap agreement
may not be part of a fungible class of agreements that are standardized as to
their material economic terms. Second, the creditworthiness of parties with
actual or potential obligations under the swap agreement must be a material
consideration in entering into or determining the terms of the swap agreement,
including pricing, cost or credit enhancement terms. Third, swap agreements may
not be entered into and traded on or through a multilateral transaction
execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are
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undertaken in conjunction with a line of business, and (4) are not marketed to
the public.
LOAN PARTICIPATION INTERESTS
A Fund's investment in loan participation interests may take the form of
participation interests in, assignments or novations of a corporate loan
("Participation Interests"). The Participation Interests may be acquired from an
agent bank, co-lenders or other holders of Participation Interests
("Participants"). In a novation, a Fund would assume all of the rights of the
lender in a corporate loan, including the right to receive payments of principal
and interest and other amounts directly from the borrower and to enforce its
rights as a lender directly against the borrower. As an alternative, a Fund may
purchase an assignment of all or a portion of a lender's interest in a corporate
loan, in which case, a Fund may be required generally to rely on the assigning
lender to demand payment and enforce its rights against the borrower, but would
otherwise be entitled to all of such lender's rights in the corporate loan. A
Fund also may purchase a Participation Interest in a portion of the rights of a
lender in a corporate loan. In such a case, a Fund will be entitled to receive
payments of principal, interest and fees, if any, but generally will not be
entitled to enforce its rights directly against the agent bank or the borrower;
rather a Fund must rely on the lending institution for that purpose. A Fund will
not act as an agent bank, a guarantor or sole negotiator of a structure with
respect to a corporate loan.
In a typical corporate loan involving the sale of Participation
Interests, the agent bank administers the terms of the corporate loan agreement
and is responsible for the collection of principal and interest and fee payments
to the credit of all lenders which are parties to the corporate loan agreement.
The agent bank in such cases will be qualified under the 1940 Act to serve as a
custodian for a registered investment company such as the Trust. A Fund
generally will rely on the agent bank or an intermediate Participant to collect
its portion of the payments on the corporate loan. The agent bank monitors the
value of the collateral and, if the value of the collateral declines, may take
certain action, including accelerating the corporate loan, giving the borrower
an opportunity to provide additional collateral or seeking other protection for
the benefit of the Participants in the corporate loan, depending on the terms of
the corporate loan agreement. Furthermore, unless under the terms of a
participation agreement a Fund has direct recourse
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against the borrower (which is unlikely), a Fund will rely on the agent bank to
use appropriate creditor remedies against the borrower. The agent bank also is
responsible for monitoring compliance with covenants contained in the corporate
loan agreement and for notifying holders of corporate loans of any failures of
compliance. Typically, under corporate loan agreements, the agent bank is given
broad discretion in enforcing the corporate loan agreement, and is obligated to
use only the same care it would use in the management of its own property. For
these services, the borrower compensates the agent bank. Such compensation may
include special fees paid on structuring and funding the corporate loan and
other fees paid on a continuing basis.
A financial institution's employment as an agent bank may be terminated
in the event that it fails to observe the requisite standard of care or becomes
insolvent, or has a receiver, conservator, or similar official appointed for it
by the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. A successor agent bank generally will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of a Fund were determined by an
appropriate regulatory authority or court to be subject to the claims of the
agent bank's general or secured creditors, a Fund might incur certain costs and
delays in realizing payment on a corporate loan, or suffer a loss of principal
and/or interest. In situations involving intermediate Participants similar risks
may arise.
When a Fund acts as co-lender in connection with a participation interest
or when a Fund acquires a participation interest the terms of which provide that
a Fund will be in privity of contract with the corporate borrower, a Fund will
have direct recourse against the borrower in the event the borrower fails to pay
scheduled principal and interest. In all other cases, a Fund will look to the
agent bank to enforce appropriate credit remedies against the borrower. In
acquiring participation interests a Fund will conduct analysis and evaluation of
the financial condition of each such co-lender and participant to ensure that
the participation interest meets a Fund's qualitative standards. There is a risk
that there may not be a readily available market for loan participation
interests and, in some cases, this could result in a Fund disposing of such
securities at a substantial discount from face value or holding such
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security until maturity. When a Fund is required to rely upon a lending
institution to pay the Fund principal, interest, and other amounts received by
the lending institution for the loan participation, the Fund will treat both the
borrower and the lending institution as an "issuer" of the loan participation
for purposes of certain investment restrictions pertaining to the
diversification and concentration of the Fund's portfolio. The Funds consider
loan participation interests not subject to puts to be illiquid.
RISKS ASSOCIATED WITH DEBT SECURITIES
To the extent that a Fund invests in debt securities, it will be subject
to certain risks. The value of the debt securities held by a Fund, and thus the
net asset value of the shares of beneficial interest of the Fund, generally will
fluctuate depending on a number of factors, including, among others, changes in
the perceived creditworthiness of the issuers of those securities, movements in
interest rates, the average maturity of the Fund's investments, changes in the
relative values of the currencies in which the Fund's investments are
denominated relative to the U.S. dollar, and the extent to which the Fund hedges
its interest rate, credit and currency exchange rate risks. Generally, a rise in
interest rates will reduce the value of fixed income securities held by a Fund,
and a decline in interest rates will increase the value of fixed income
securities held by a Fund.
Corporate debt securities may bear fixed, contingent, or variable rates
of interest and may involve equity features, such as conversion or exchange
rights or warrants for the acquisition of stock of the same or a different
issuer, participations based on revenues, sales or profits, or the purchase of
common stock in a unit transaction (where corporate debt securities and common
stock are offered as a unit).
When and if available, debt securities may be purchased at a discount
from face value. However, the Funds do not intend to hold such securities to
maturity for the purpose of achieving potential capital gains, unless current
yields on these securities remain attractive. From time to time, each Fund may
purchase securities not paying interest or dividends at the time acquired if, in
the opinion of the Sub-Adviser, such securities have the potential for future
income (or capital appreciation, if any).
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Since shares of the Funds represent an investment in securities with
fluctuating market prices, the value of shares of each Fund will vary as the
aggregate value of the Funds' portfolio securities increases or decreases.
Moreover, the value of the debt securities that each Fund purchases may
fluctuate more than the value of higher rated debt securities. These lower rated
fixed income securities generally tend to reflect short-term corporate and
market developments to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates. Changes in the
value of securities subsequent to their acquisition will not affect cash income
or yields to maturity to the Funds but will be reflected in the net asset value
of the Funds' shares.
RISKS OF INVESTING IN HIGH YIELD SECURITIES ("JUNK BONDS")
High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade bonds. The prices
of high yield bonds have been found to be less sensitive to interest-rate
changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield bond prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of high yield bonds,
especially in a thinly traded market.
Legislation designed to limit the use of high yield bonds in corporate
transactions may have a material adverse effect on a Fund's net asset value and
investment practices. In addition, there may be special tax considerations
associated with investing in high yield bonds structured as zero coupon or
payment-in-kind securities. A Fund records the interest on these securities
annually as income even though it receives no cash interest until the security's
maturity or payment date. Also, distributions on account of such interest
generally will be taxable to shareholders even if the Fund does not distribute
cash to them. Therefore, in order to pay taxes on this interest, shareholders
may have to redeem some of their shares to pay the tax or the Fund may have to
sell some of its assets to reduce the Fund's
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assets and may thereby increase its expense ratio and decrease its rate of
return.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following restrictions may not be changed with respect to any Fund
without the approval of the majority of the outstanding voting securities of
that Fund (as defined in the 1940 Act). Investment restrictions that appear
below or elsewhere in this Statement of Additional Information that involve a
maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by or on behalf of, a Fund.
The Trust may not, on behalf of any Fund:
1. With respect to 75% of each Fund's total assets invest more than 5% of
the value of the total assets of a Fund in the securities of any one issuer,
except U.S. government securities, or purchase the securities of any issuer if
such purchase would cause more than 10% of the voting securities of such issuer
to be held by a Fund. This restriction does not apply to the California Tax Free
Fund, Equity Index Fund, International Bond Fund, New York Tax Free Fund and
Global High Yield Fund.
2. Borrow money except from banks on a temporary basis for extraordinary
or emergency purposes, including the meeting of redemption requests, or by
engaging in reverse repurchase agreements or comparable portfolio transactions
provided that these Funds maintain asset coverage of at least 300% for all such
borrowings, and no purchases of securities will be made while such borrowings
exceed 5% of the value of the Fund's total assets (10% in the case of the
California Tax Free Fund and New York Tax Free Fund).
3. Purchase securities (or with respect to the California Tax Free Fund,
New York Tax Free Fund, and Tax Free Bond Fund purchase (I) Pollution Control
and Industrial Development Bonds or (ii) securities the interest from which is
not exempt from regular federal income tax) if such purchase would cause 25% or
more in the aggregate of the market value of the total assets of a Fund to be
invested in the securities of one or more issuers having their principal
business activities in the same industry,
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provided that there is no limitation in respect to investments in U.S.
government securities or, with respect to each Fund except Strategic Value Fund,
investments in repurchase agreements with respect thereto (for the purposes of
this restriction, telephone companies are considered to be a separate industry
from gas or electric utilities, and wholly owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of the parents) except that (a)
the above limitation does not apply to the Equity Index Fund to the extent that
the Standard & Poor's 500 Composite Stock Price Index is so concentrated; (b) up
to 40% of the High Yield Corporate Bond Fund's, Strategic Income Fund's and
Strategic Value Fund's total assets, taken at market value, may be invested in
each of the electric utility and telephone industries, but each Fund will not
invest 25% or more in either of those industries unless yields available for
four consecutive weeks in the four highest rating categories on new issue bonds
in such industry (issue size of $50 million or more) have averaged in excess of
105% of yields of new issue long-term industrial bonds similarly rated (issue
size of $50 million or more); (c) 25% or more of the market value of the total
assets of the Money Market Fund will be invested in the securities of banks and
bank holding companies, including certificates of deposit and bankers'
acceptances; and (d) at such time that the 1940 Act is amended to permit a
registered investment company to elect to be "periodically industry
concentrated" (i.e., a fund that does not concentrate its investments in a
particular industry would be permitted, but not required, to invest 25% or more
of its total assets in a particular industry) the Funds elect to be so
classified and the foregoing limitation shall no longer apply with respect to
the Funds. With respect to the California Tax Free Fund and New York Tax Free
Fund, private activity bonds ultimately payable by companies within the same
industry are treated as if they were issued by issuers in the same industry for
purposes of this restriction.
4. Purchase or sell real estate (excluding securities secured by real
estate or interests therein or issued by companies that invest in or deal in
real estate) or, in the case of the California Tax Free Fund and New York Tax
Free Fund, real estate investment trust securities; commodities and commodity
contracts. The Trust reserves the freedom of action to hold and to sell real
estate acquired for any Fund as a result of the ownership of securities.
Purchases and sales of foreign currencies on a spot basis and forward foreign
currency exchange contracts, options on currency, futures contracts on
currencies
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(or securities, with respect to the MAP Equity Fund, Blue Chip Growth Fund,
Research Value Fund, Small Cap Value Fund, Growth Opportunities Fund, Small Cap
Growth Fund, Equity Income Fund, Global High Yield Fund and Strategic Value
Fund) or securities indices and options on such futures contracts are not deemed
to be an investment in a prohibited commodity or commodity contract for the
purpose of this restriction.
5. Make loans to other persons, except loans of portfolio securities (in
the case of the California Tax Free Fund and New York Tax Free Fund, in an
amount not to exceed 10% of the value of each Fund's total assets in accordance
with applicable guidelines approved by the Board of Trustees and 30% in the case
of the Equity Index Fund). The purchase of debt obligations (and bankers'
acceptances and commercial paper in the case of the Equity Index Fund) and the
entry into repurchase agreements in accordance with a Fund's investment
objectives and policies are not deemed to be loans for this purpose.
6. Act as an underwriter of securities issued by others, except to the
extent that a Fund may be considered an underwriter within the meaning of the
1933 Act, as amended, in the disposition of portfolio securities.
7. Issue senior securities, except to the extent permitted under the
Investment Company Act of 1940.
The following fundamental investment restriction is applicable to the Tax
Free Bond Fund only. The Tax Free Bond Fund must:
1. Invest at least 80% of the Fund's net assets in securities the
interest on which is exempt from regular federal income tax, except that the
Fund may temporarily invest more than 20% of its net assets in securities the
interest income on which may be subject to regular federal income tax.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to the Trust's fundamental investment restrictions, the
Trustees of the Trust have voluntarily adopted certain policies and restrictions
which are observed in the conduct of the affairs of the Funds. These represent
intentions of the Trustees based upon current circumstances. They differ from
fundamental investment policies in that the following additional investment
restrictions may be changed or amended by
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action of the Trustees without requiring prior notice to or approval of
shareholders.
The following are non-fundamental restrictions of the Capital
Appreciation Fund, Convertible Fund, Government Fund, High Yield Corporate Bond
Fund, Money Market Fund, Tax Free Bond Fund, Total Return Fund and Value Fund.
Each of these Funds may not:
(a) purchase from or sell portfolio securities of a Fund to any
of the officers or Trustees of the Trust, its investment advisers, its
principal underwriter or the officers, or directors of its Sub-Advisers
or principal underwriter;
(b) invest more than 10% of the net assets of a Fund (taken at
market value at the time of the investment) in "illiquid securities,"
illiquid securities being defined to include securities subject to legal
or contractual restrictions on resale (other than restricted securities
eligible for resale pursuant to Rule 144A or Section 4(1) under the
Securities Act of 1933 determined to be liquid pursuant to guidelines
adopted by the Board), repurchase agreements maturing in more than seven
days, certain options traded over the counter that a Fund has written,
securities for which market quotations are not available, or other
securities which legally or in the opinion of the Sub-Adviser are deemed
illiquid;
(c) purchase the securities of other investment companies, except
to the extent permitted by the 1940 Act or in connection with merger,
consolidation, acquisition or reorganization;
(d) invest in other companies for the purpose of exercising
control or management;
(e) purchase securities on margin except in connection with
arbitrage transactions or make short sales, unless by virtue of its
ownership of other securities, it has the right to obtain securities
equivalent in kind and amount to the securities sold, except that the
Trust may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities and in connection with
transactions involving forward foreign currency exchange contracts;
(f) purchase or sell any put or call options or any combination
thereof, except that the Trust may purchase and
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sell or write (i) options on any futures contracts into which it may
enter, (ii) put and call options on currencies, securities indexes and
covered put and call options on securities, and (iii) may also engage in
closing purchase transactions with respect to any put and call option
position it has entered into; and except that the Government Fund may
not write any covered put options on U.S. government securities if, as a
result, more than 50% of its total assets (taken at current value) would
be subject to put options written by such Fund;
(g) purchase, with respect to the Government Fund, any call
option, long futures contract or long option on a futures contract if,
at the date of purchase, realized net losses from such transactions
during the fiscal year to date exceed 5% of such Fund's average net
assets during such period;
(h) As an operating policy, each of the High Yield Corporate
Bond Fund and Strategic Income Fund may not invest more than 15% of its
net assets in securities rated lower than B by Moody's or S&P;
(i) As an operating policy, the Convertible Fund may not invest
more than 5% of its total assets in securities that are rated less than
B by Moody's Investors Service, Inc. ("Moody's") or S&P; or are unrated
but judged by the sub-adviser to be of comparable quality; or
(j) As an operating policy, the Total Return Fund may not invest
more than 5% of its net assets in securities rated below investment
grade. Up to 20% of the Total Return Fund's debt securities may be
rated below A but must be rated at least Ba (Moody's) or BB (S&P), or,
if unrated, judged by the Sub-Adviser to be of comparable quality.
The following are non-fundamental restrictions of the California Tax
Free Fund, Equity Index Fund and New York Tax Free Fund:
(a) A Fund may not purchase the securities of other investment
companies except to the extent permitted by the 1940 Act or in
connection with a merger, consolidation or reorganization.
(b) The Funds may not invest more than 10% of the net assets of a
Fund (taken at market value at the time of the investment) in "illiquid
securities," illiquid securities being defined to include securities
subject to legal or contractual restrictions on resale (other than
restricted securities eligible for resale pursuant to Rule 144A or
Section 4(1) under the Securities Act of 1933 determined to be liquid
pursuant to guidelines adopted by the Board).
(c) A Fund may not invest in other companies for the purpose of
exercising control or management.
B-126
<PAGE> 205
(d) A Fund may not purchase securities on margin, except in
connection with arbitrage transactions, or make short sales, unless it
owns the securities sold short or it has the right to obtain securities
equivalent in kind and amount to the securities sold, except that the
Trust may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities. (This restriction has no
application to transactions in futures, options and foreign currency
exchange contracts).
The following are non-fundamental restrictions of the International Bond
Fund, International Equity Fund, Strategic Income Fund and Strategic Value Fund:
(a) As an operating policy, a Fund may not sell securities short,
except for covered short sales or unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold
short, and provided that transactions in options, futures and forward
contracts are deemed not to constitute short sales of securities.
(b) As an operating policy, a Fund may not purchase securities on
margin, except that the Fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute the purchase of securities on margin.
This restriction is not applicable to the Strategic Income Fund.
(c) As an operating policy, a Fund may not invest in securities
which are not readily marketable, or the disposition of which is
restricted under federal securities laws (collectively, "illiquid
securities"), other than Rule 144A securities or Section 4(2) commercial
paper determined to be liquid pursuant to guidelines adopted by the
Trust's Board of Trustees if, as a result, more than 15% of the Fund's
net assets would be invested in illiquid securities. A Fund may not
invest more than 15% of its net assets in repurchase agreements
providing for settlement in more than seven days, or in other
instruments which for regulatory purposes or in the Sub-Adviser's
opinion may be deemed to be illiquid, such as a certain portion of
options traded in the over-the-counter market, and securities being used
to cover options a Fund has written.
B-127
<PAGE> 206
(d) As an operating policy, a Fund may not purchase the
securities of other investment companies, except to the extent permitted
by the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization.
The following are non-fundamental restrictions of the MAP Equity Fund,
Blue Chip Growth Fund, Research Value Fund, Small Cap Value Fund, Growth
Opportunities Fund, Small Cap Growth Fund, Equity Income Fund and Global High
Yield Fund:
(a) As an operating policy, a Fund may not sell securities short,
except for covered short sales or unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, futures and forward contracts are deemed
not to constitute short sales of securities.
(b) As an operating policy, a Fund may not purchase securities on
margin, except that the Fund may obtain such short-term credits as are necessary
for the clearance of transactions, and provided that margin payments in
connection with futures contracts and options on futures contracts shall not
constitute the purchase of securities on margin.
(c) As an operating policy, a Fund may not invest in securities
which are not readily marketable, or the disposition of which is restricted
under federal securities laws (collectively, "illiquid securities"), other than
Rule 144A securities and Section 4(2) commercial paper determined to be liquid
pursuant to guidelines adopted by the Trust's Board of Trustees if, as a result,
more than 15% of the Fund's net assets would be invested in illiquid securities.
A Fund may not invest more than 15% of its net assets in repurchase agreements
providing for settlement in more than seven days, or in other instruments which
for regulatory purposes or in the Sub-Adviser's opinion may be deemed to be
illiquid, such as a certain portion of options traded in the over-the-counter
market, and securities being used to cover options a Fund has written.
(d) As an operating policy, a Fund may not purchase the
securities of other investment companies except to the extent permitted by the
1940 Act or in connection with a merger, consolidated, acquisition, or
reorganization.
(e) As an operating policy, the Blue Chip Growth Fund may not
invest 10% or more of its total assets in securities of non-U.S. issuers.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Fund's net asset value.
B-128
<PAGE> 207
In addition, though not a fundamental policy, the California Tax Free
and New York Tax Free Funds will not sell securities short, except that each
Fund reserves the right to sell securities short "against the box."
In addition, though not a fundamental policy, the Equity Index Fund may
not engage in arbitrage transactions, nor may it purchase warrants (excluding
those acquired by the Equity Index Fund in units or attached to securities), nor
will the Equity Index Fund sell securities short or buy on margin, except that
the Fund reserves the right to sell securities short "against the box."
The Trustees have the ultimate responsibility for determining whether
specific securities are liquid or illiquid. The Trustees have delegated the
function of making day-to-day determinations of liquidity to the Sub-Advisers,
pursuant to guidelines approved by the Trustees.
Each Sub-Adviser takes into account a number of factors in determining
whether a Rule 144A security being considered for purchase by a Fund is liquid,
including at least the following:
(I) the frequency and size of trades and quotes for the Rule 144A
security relative to the size of the Fund's holding;
(ii) the number of dealers willing to purchase or sell the 144A
security and the number of other potential purchasers;
(iii) dealer undertakings to make a market in the 144A security;
and
(iv) the nature of the 144A security and the nature of the market
for the 144A security (i.e., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer).
To make the determination that an issue of 4(2) commercial paper is liquid, a
Sub-Adviser must conclude that the following conditions have been met:
(a) the 4(2) commercial paper is not traded flat or in
default as to principal or interest;
(b) the 4(2) commercial paper is rated:
B-129
<PAGE> 208
(I) in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations ("NRSROs");or
(ii) if only one NRSRO rates the security, the 4(2) commercial
paper is rated in one of the two highest rating categories by that NRSRO; or
(iii) if the security is unrated, the Sub-Adviser has determined
that the security is of equivalent quality based on factors commonly used by
rating agencies; and
(c) there is a viable trading market for the specific security,
taking into account all relevant factors (e.g., whether the security is the
subject of a commercial paper program that is administered by an issuing and
paying agent bank and for which there exists a dealer willing to make a market
in the security, the size of trades relative to the size of the Fund's holding
or whether the 4(2) commercial paper is administered by a direct issuer pursuant
to a direct placement program).
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
PORTFOLIO TURNOVER
[to come]
TRUSTEES AND OFFICERS
The Board of Trustees oversees the Funds, the Manager and the
Sub-Advisers. Information pertaining to the Trustees and officers of the Trust
is set forth below. Trustees deemed to be "interested persons" of the Trust for
purposes of the 1940 Act are indicated by an asterisk.
B-130
<PAGE> 209
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- ------------------------ ---------------------- -------------------
<S> <C> <C>
Richard M. Kernan, Chairman and Director of MainStay VP Series
Jr.* Trustee Fund, Inc. From January 1987 to
51 Madison Avenue present; Chairman of the board
New York, NY 10010 and Chief Executive Officer of
Age 57 MainStay VP Series Fund, Inc.
From August 1989 to present;
Executive Vice President and
Chief Investment Officer of New
York Life Insurance Company from
March 1995 to present; Executive
Vice President prior thereto;
Member of the Board of Directors
of New York Life Insurance
Company from November 1996 to
present and Chairman of the
Investment Committee from
January 1997 to present; and
Director, Greystone Realty Corp.
January 1997 to present.
Stephen C. Roussin* President, Chief Director and Chairperson,
51 Madison Avenue Executive Officer MainStay Institutional Funds,
New York, NY 10010 and Trustee Inc., 1997 to present; Senior
Age 34 Vice President, New York Life
Insurance Company, 1997 to
present; Senior Vice President,
Smith Barney, 1994 to 1997; and
Division Sales Manager,
Prudential Securities, 1989 to
1994.
Harry G. Hohn* Trustee Retired Chairman and Chief
51 Madison Avenue Executive Officer, New York Life
New York, NY 10010 Insurance Company; Chairman of
Age: 66 the Board and Chief Executive
Officer, New York Life Insurance
Company, 1990 to 1997; Vice
Chairman of the Board, New York
Life Insurance Company, 1986 to
1990; Director, New York Life
Insurance Company, 1985 to 1986;
Director, Million Dollar
Roundtable Foundation, 1996 to
1997; Director, Insurance
Marketplace Standards
Association, 1996 to 1997;
Director, Witco Corporation,
1989 to present; Member,
International Advisory Board of
</TABLE>
B-131
<PAGE> 210
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- ------------------------ ---------------------- -------------------
<S> <C> <C>
Credit Commercial de France,
1995 to present; and a Life
Fellow of the American Bar
Foundation.
Edward J. Hogan Trustee Rear Admiral U.S. Navy
Box 2321 (Retired); Independent
Sun Valley, ID 83353 Management Consultant, 1992 to
Age: 65 1997.
Nancy Maginnes Trustee Member, Council of Rockefeller
Kissinger University, New York, NY, 1991 to
Henderson Road present; Trustee, Rockefeller
South Kent, CT 06785 University, 1995 to present;
Age: 64 Trustee, Animal Medical Center,
1993 to present; and Trustee, The
Masters School, 1994 to present;
Member, Board of Overseers,
Rockefeller Institute of
Government, Albany, NY, 1983-
1992 (Board dissolved).
Terry L. Lierman Trustee President, Capitol Associates,
426 C Street, N.E. Inc., 1984 to present; President,
Washington, D.C. 20002 Employee Health Programs, 1990 to
Age: 50 present; Vice Chairman, TheraCom
Inc., 1994 to present; Member,
UNICEF National Board, 1993 to
present; Director, Harvard
University, Pollin Institute,
1995 to present; Director,
PeacePac, 1994 to present;
Commissioner, State of Maryland,
Higher Education Commission, 1995
to present; Vice Chairman,
National Organization on
Fetal Alcohol Syndrome, 1993 to
present; Chief Executive Officer,
Medical Crisis Systems, 1997 to
present; and Board Member,
Hollings Cancer Center, Medical
University of South Carolina,
1993 to present.
</TABLE>
B-132
<PAGE> 211
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- ------------------------ ---------------------- -------------------
<S> <C> <C>
John B. McGuckian Trustee Chairman of the Board, Ulster
Ardverna Television plc, 1990 to present;
Cloughmills Director, Ulster Television plc,
Northern Ireland 1970 to present; Chairman of the
BT4 49NL Board, Tedcastle Holding Ltd.
Age: 58 (energy), 1995 to present;
Director, Cooneen Textiles Ltd.
(clothing manufacturer), 1967 to
present; Director Allied Irish
Banks plc, 1977 to present;
Director, First Trust Bank, 1991
to present; Director, Unidare plc
(engineering), 1986 to present;
Director, Irish Continental Group
plc (ferry operations), 1988 to
present; Director, Harbour Group
Ltd. (management company), 1980
to present; Chairman, Industrial
Development Board, 1990 to 1997;
and Chairman of Senate and Senior
Pro-Chancellor, Queen's
University, 1986 to present.
Donald E. Nickelson Trustee Vice Chairman, Harbour Group
1701 Highway A-1-A Industries, Inc., 1991 to
Suite 218 present; Director, PaineWebber
Vero Beach, FL 32963 Group, 1980 to 1993; President,
Age: 65 PaineWebber Group, 1988 to 1990;
Chairman of the Board, Paine
Webber Properties, 1985 to 1989;
Director, Harbour Group, 1986 to
present; Chairman of the Board
and Director, Rapid Rock
Industries, Inc., 1986 to
present; Director and Chairman of
the Board, Del Industries, 1990
to present; Trustee, Jones
Foundation (Los Angeles), 1978 to
present; Director, Sugen, Inc.,
1992 to present; Chairman of the
Board, Omniquip International,
Inc., 1996 to present; Director,
Carey Diversified, L.L.C.,
January 1,1998 to present.
</TABLE>
B-133
<PAGE> 212
<TABLE>
<S> <C> <C>
Donald K. Ross* Trustee Retired Chairman and Chief
953 Cherokee Lane Executive Officer, New York Life
Franklin Lakes, NJ Insurance Company; Director, New
07417 York Life Insurance Company, 1978
Age: 72 to 1996; President, New York Life
Insurance Company, 1986 to 1990;
Chairman of the Board, New York
Life Insurance Company, 1981 to
1990; Chief Executive Officer,
New York Life Insurance Company,
1981 to 1990; Director, MacKay-
Shields Financial Corporation,
1984 to present; and Trustee,
Consolidated Edison Company of
New York, Inc., 1976 to present.
Richard S. Trutanic Trustee Managing Director, The Somerset
1155 Connecticut Ave. Group (financial advisory firm),
N.W., Suite 400 1990 to present; Chief Executive
Washington, DC 20036 Officer and President, Americap
Age: 45 L.L.C. (Financial Advisory Firm),
1997 to present; Senior Vice
President, Washington National
Investment Corporation (financial
advisory firm), 1985 to 1990;
Director, Allin Communications
Corporation, 1996 to 1997; and
Director and Member of Executive
Committee, Southern Net, Inc.,
1986 to 1990.
</TABLE>
- -------------------------------------------------------------------------------
OFFICERS (OTHER THAN TRUSTEES)
- -------------------------------------------------------------------------------
B-134
<PAGE> 213
<TABLE>
<S> <C> <C>
Jefferson C. Boyce Senior Vice Chairman, Monitor Capital
51 Madison Avenue President Advisors, Inc., 1997 to present;
New York, NY 10010 Senior Vice President, MainStay
Age: 40 Institutional Funds Inc., 1995
to present; Senior Vice
President, New York Life
Insurance Company, 1994 to
present; Director, NYLIFE
Distributors Inc., 1993 to
present; and Chief
Administrative Officer, Pension,
Mutual Funds, Structured
Finance, Corporate Quality,
Human Resources and Employees'
Health Departments, New York
Life Insurance Company, 1992 to
1994.
Anthony W. Polis Vice President and Vice President, New York Life
51 Madison Avenue Chief Financial Insurance Company, 1988 to
New York, NY 10010 Officer present; Director, Vice
Age: 54 President and Chief Financial
Officer, NYLIFE Securities Inc.,
1988 to present; Vice President
and Chief Financial Officer,
NYLIFE Distributors Inc., 1993
to present; Treasurer, MainStay
Institutional Funds Inc., 1990
to present; Treasurer, MainStay
VP Series Fund, Inc., 1993 to
present; Assistant Treasurer,
MainStay VP Series Fund, Inc.,
1992 to 1993; Vice President and
Treasurer, Eclipse Financial
Asset Trust, 1992 to present;
Vice President and Chief
Financial Officer, Eagle
Strategies Corp. (registered
investment adviser), 1993 to
present.
</TABLE>
B-135
<PAGE> 214
<TABLE>
<S> <C> <C>
Richard Zuccaro Tax Vice Vice President, New York Life
51 Madison Avenue President Insurance Company, 1995 to
New York, NY 10010 present; Vice President -- Tax,
Age: 48 New York Life Insurance Company,
1986 to 1995; Tax Vice
President, NYLIFE Securities
Inc., 1987 to present; Tax Vice
President, NAFCO, Inc., 1990 to
present; Tax Vice President,
NYLIFE Depositary Inc., 1990 to
present; Tax Vice President,
NYLIFE Inc., 1990 to present;
Tax Vice President, NYLIFE
Insurance Company of Arizona,
1990 to present; Tax Vice
President, NYLIFE Realty Inc.,
1991 to present; Tax Vice
President, NYLICO Inc., 1991 to
present; Tax Vice President, New
York Life Fund Inc., 1991 to
present; Tax Vice President, New
York Life International
Investment, Inc., 1991 to
present; Tax Vice President,
NYLIFE Equity Inc., 1991 to
present; Tax Vice President,
NYLIFE Funding Inc., 1991 to
present; Tax Vice President,
NYLCO Inc., 1991 to present; Tax
Vice President, MainStay VP
Series Fund, Inc., 1991 to
present; Tax Vice President, CNP
Realty, 1991 to present; Tax
Vice President, New York Life
Worldwide Holding Inc., 1992 to
present; Tax Vice President,
NYLIFE Structured Asset
Management Co. Ltd., 1992 to
present; Tax Vice President,
MainStay Institutional Funds
Inc., 1992 to present; Tax Vice
President, NYLIFE Distributors
Inc., 1993 to present; Vice
President & Assistant
Controller, New York Life
Insurance and Annuity Corp.,
1995 to present, and Assistant
Controller, 1991 to present;
Vice President, NYLCARE Health
Plans, Inc., 1995 to present;
Vice President - Tax, New York
Life and Health Insurance Co.,
1996 to present; and Tax Vice
President, NYL Trust Company,
1996 to present.
</TABLE>
B-136
<PAGE> 215
*Messrs. Ross, Roussin, Hohn and Kernan are deemed to be "interested persons" of
the Trust under the 1940 Act.
As indicated in the above table, certain Trustees and officers also hold
positions with MacKay-Shields, Monitor, New York Life Insurance Company, NYLIFE
Securities Inc. and/or NYLIFE Distributors Inc.
Effective August 1, 1998, the Independent Trustees of the Trust receive
from the Trust an annual retainer of $45,000 and a fee of $2,000 for each Board
of Trustees meeting and for each Board committee meeting attended and are
reimbursed for all out-of-pocket expenses related to attendance at such
meetings. Trustees who are affiliated with New York Life Insurance Company do
not receive compensation from the Trust.
For the fiscal year ended December 31, 1998, the Trustees received the
following compensation from the Trust and from certain other investment
companies (as indicated) that have the same investment advisers as the Trust or
an investment adviser that is an affiliated person of one of the Trust's
investment advisers:
Total Compensation
Aggregate From Registrant
Name of Compensation and Fund Complex
Trustee from the Trust Paid to Trustees
- ------- -------------- ------------------
Edward J. Hogan
Nancy M. Kissinger
Terry L. Lierman
Donald E. Nickelson
Richard S. Trutanic
John B. McGuckian*
As of _______ __, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of the outstanding shares of any class of beneficial interest
of each of the Funds.
THE MANAGER, THE SUB-ADVISERS AND THE DISTRIBUTOR
MANAGEMENT AGREEMENT
B-137
<PAGE> 216
Pursuant to the Management Agreement for the Funds, MainStay Management,
Inc. (the "Manager"), subject to the supervision of the Trustees of the Trust
and in conformity with the stated policies of the Funds, administers the Funds'
business affairs and has investment advisory responsibilities. MainStay
Management, Inc is a direct subsidiary of NYLIFE Inc. which is a direct
subsidiary of New York Life Insurance Company.
The Trustees, including the Independent Trustees, approved the Management
Agreement with respect to the Funds then in operation, as well as the Strategic
Value Fund, at an in-person meeting held July 28, 1997. On April 27, 1998, the
Trustees approved the Management Agreement with respect to the Blue Chip Growth
Fund, Research Value Fund, Small Cap Value Fund, Growth Opportunities Fund,
Small Cap Growth Fund, Equity Income Fund and Global High Yield Fund, and
approved the continuation of the Agreement with respect to the other Funds. On
October 24, 1997, the shareholders of each of the Funds other than the Strategic
Value Fund approved the Management Agreement. The Management Agreement for the
Strategic Value Fund was approved by the Fund's sole shareholder on October 21,
1997. On May 29, 1998, the sole initial shareholder of Blue Chip Growth Fund,
Research Value Fund, Small Cap Value Fund, Growth Opportunities Fund, Small Cap
Growth Fund, Equity Income Fund and Global High Yield Fund approved the
Management Agreement with respect to those Funds. On _________, 1999, the
Shareholders of the MAP Equity Fund approved the Management Agreement. The
Management Agreement will remain in effect for two years following its effective
date, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by the Trustees or by vote of a majority
of the outstanding voting securities of each of the Funds (as defined in the
1940 Act and in a rule under the 1940 Act) and, in either case, by a majority of
the Trustees who are not "interested persons" of the Trust or the Manager (as
the term is defined in the 1940 Act).
The Manager has authorized any of its directors, officers and employees
who have been elected or appointed as Trustees or officers of the Trust to serve
in the capacities in which they have been elected or appointed.
The Management Agreement provides that the Manager shall not be liable to
a Fund for any error or judgment by the Manager or for any loss sustained by a
Fund except in the case of the Manager's willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. The Management Agreement also provides
that it shall terminate automatically if assigned and that it may be
B-138
<PAGE> 217
terminated without penalty by either party upon no more than 60 days' nor less
than 30 days' written notice.
In connection with its administration of the business affairs of each of
the Funds, and except as indicated in the Prospectus under the heading "Manager,
Sub-Advisers and Distributor," the Manager bears the following expenses:
(a) the salaries and expenses of all personnel of the Trust and the
Manager, except the fees and expenses of Trustees not affiliated with the
Manager or the Sub-Adviser;
(b) the fees to be paid to the Sub-Advisers pursuant to the Sub-Advisory
Agreements; and
(c) all expenses incurred by the Manager in connection with administering
the ordinary course of the Funds' business, other than those assumed by the
Trust.
SUB-ADVISORY AGREEMENTS
Pursuant to Sub-Advisory Agreements between the Manager and each of the
Sub-Advisers, subject to the supervision of the Trustees of the Trust and the
Manager and in conformity with the stated policies of each of the Funds and the
Trust, MacKay-Shields, Monitor, GAMCO, John A. Levin & Co., DGHM, Madison Square
Advisors and Markston manage the Funds' portfolios, including the purchase,
retention, disposition and loan of securities.
The Trustees, including the Independent Trustees, approved the
Sub-Advisory Agreements with MacKay-Shields and Monitor with respect to the
Funds then in operation, as well as the Strategic Value Fund, at an in-person
meeting held July 28, 1997. On April 27, 1998, the Trustees approved the
Sub-Advisory Agreement with GAMCO on behalf of the Blue Chip Growth Fund, the
Sub-Advisory Agreement with John A. Levin & Co. On behalf of the Research Value
Fund, the Sub-Advisory Agreement with Dalton, Greiner on behalf of the Small Cap
Value Fund, the Sub-Advisory Agreement with Madison Square Advisors on behalf of
the Growth Opportunities Fund, and the Sub-Advisory Agreement with
MacKay-Shields on behalf of Small Cap Growth Fund, Equity Income Fund and Global
High Yield Fund. On that date, the Trustees also approved the continuation of
the Sub- Advisory Agreements previously approved for the other funds. On October
24, 1997, the shareholders of each of the Funds other than the Strategic Value
Fund approved the Sub-Advisory Agreements with MacKay-Shields and Monitor. The
Sub-Advisory Agreement with
B-139
<PAGE> 218
respect to the Strategic Value Fund was approved by that Fund's sole shareholder
on October 21, 1998. On May 29, 1998 the sole initial shareholder of Blue Chip
Growth Fund, Research Value Fund, Small Cap Value Fund, Growth Opportunities
Fund, Small Cap Growth Fund, Equity Income Fund and Global High Yield Fund
approved the Sub-Advisory Agreements with respect to those Funds. On __________,
1999 the Shareholders of the MAP Equity Fund approved the Sub- Advisory
Agreement. The Sub-Advisory Agreements will remain in effect for two years
following their effective date, and will continue in effect thereafter only if
such continuance is specifically approved at least annually by the Trustees or
by vote of a majority of the outstanding voting securities of each of the Funds
(as defined in the 1940 Act and in a rule under the 1940 Act) and, in either
case, by a majority of the Trustees who are not "interested persons" of the
Trust, the Manager, MacKay-Shields or Monitor (as the term is defined in the
1940 Act).
The Sub-Advisers have authorized any of their directors, officers and
employees who have been elected or appointed as Trustees or officers of the
Trust to serve in the capacities in which they have been elected or appointed.
In connection with the services they render, the Sub-Advisers bear the salaries
and expenses of all of their personnel.
The Sub-Advisory Agreements provide that the Sub-Advisers shall not be
liable for any error of judgment by the Sub-Advisers or for any loss suffered by
any of the Funds except in the case of a Sub-Adviser's willful misfeasance, bad
faith, gross negligence or reckless disregard of duty. The Agreements also
provide that they shall terminate automatically if assigned and that they may be
terminated without penalty by either party upon no more than 60 days' nor less
than 30 days' written notice.
For fiscal year ended December 31, 1998 and the period from October 27,
1997 through December 31, 1997, the amount of the Management fee paid and waived
and/or reimbursed by each Fund; the amount of the Sub-Advisory fee paid by the
Manager from the Management fee; and the amount of the Sub-Advisory fee waived
and/or reimbursed were as follows (the Blue Chip Growth Fund, Research Value
Fund, Small Cap Value Fund, Growth Opportunities Fund, Small Cap Growth Fund,
Equity Income Fund and Global High Yield Fund had not commenced operations as of
December 31, 1997):
Management Management
Year ended 12/31/98 Management Fee Waived Sub-Advisory Fee Waived
Fund Fee Paid* and/or Reimbursed Fee Paid* and/or Reimbursed
- ---- -------- ----------------- -------- -----------------
B-140
<PAGE> 219
Blue Chip Growth Fund
California Tax Free Fund.....
Capital Appreciation Fund....
Convertible Fund.............
Equity Income Fund
Equity Index Fund+...........
Global High Yield Fund
Government Fund..............
Growth Opportunities Fund
High Yield Corporate Bond
Fund.....................
International Bond Fund.....
International Equity Fund...
Money Market Fund............
New York Tax Free Fund.......
Research Value Fund
Small Cap Growth Fund
Small Cap Value Fund
Strategic Income Fund++......
Strategic Value Fund++.......
Tax Free Bond Fund...........
Total Return Fund............
Value Fund...................
* After expense reimbursement or waiver.
+ The Equity Index Fund's expense limitation was terminated April 1, 1998.
++ The Strategic Income Fund commenced operations on February 28, 1997.
Effective February 28, 1998, the Fund's expense cap was terminated.
The Strategic Value Fund commenced operations on October 21, 1997.
10/27/97 - 12/31/97
<TABLE>
<CAPTION>
Management Sub-Advisory
Management Fee Waived Sub-Advisory Fee Waived
Fund Fee Paid* and/or Reimbursed Fee Paid* and/or Reimbursed
- ---- ---------- ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
California Tax Free Fund..... $ 22,562 $ -- $ 11,281 $ --
Capital Appreciation Fund.... 1,996,154 -- 998,077 --
Convertible Fund............. 1,210,730 -- 605,365 --
Equity Index Fund+........... 149,354 223,441 74,559 --
Government Fund.............. 712,902 -- 356,451 --
High Yield Corporate Bond
Fund..................... 3,590,202 -- 1,795,101 --
International Bond Fund..... 24,178 18,134 15,111 12,089
International Equity Fund... 145,829 -- 87,497 --
Money Market Fund............ 165,694 205,316 82,847 102,658
New York Tax Free Fund....... 11,863 5,413 5,932 2,707
Strategic Income Fund++...... -- 74,218 -- 37,109
Strategic Value Fund++....... 23,276 -- 11,638 --
Tax Free Bond Fund........... 533,914 -- 266,957 --
Total Return Fund............ 1,431,434 -- 715,717 --
Value Fund................... 1,479,934 -- 739,967 --
</TABLE>
* After expense reimbursement or waiver.
+ The Equity Index Fund's expense limitation was terminated April 1, 1998.
++ The Strategic Income Fund commenced operations on February 28, 1997.
Effective February 28, 1998, the Fund's expense cap was terminated.
The Strategic Value Fund commenced operations on October 21, 1997.
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<PAGE> 220
In previous years, prior to a change in management structure, the Funds
paid an advisory fee directly to MacKay-Shields or Monitor. For the period from
January 1, 1997 through October 26, 1997 and the fiscal year ended December 31,
1996, the amount of the advisory fee paid and waived and/or reimbursed, by each
Fund to MacKay-Shields or Monitor was as follows:
<TABLE>
<CAPTION>
1/1/97 - 10/26/97 Year ended 1996
--------------------- ---------------
Advisory Advisory
Fee Waived Fee Waived
Advisory and/or Advisory and/or
Reimbursed Fee Paid* Reimbursed Fee Paid* Reimbursed
---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
California Tax Free Fund. $ 44,678 $ 2,589 $ 45,307 $ 11,228
Capital Appreciation Fund 3,934,494 -- 3,429,258 --
Convertible Fund......... 2,710,393 -- 2,444,000 --
Equity Index Fund........ 256,066 -- 163,785 --
Government Fund.......... 1,760,807 -- 2,643,801 --
High Yield Corporate Bond
Fund.................. 6,921,965 5,816,110 --
International Bond Fund.. 65,696 52,556 68,489 54,933
International Equity Fund 384,003 -- 342,100 --
Money Market Fund........ 407,638 396,862 397,071 473,155
New York Tax Free Fund... 25,025 13,579 29,457 19,911
Strategic Income Fund+... 61,282 40,291 N/A N/A
Strategic Value Fund+.... N/A N/A N/A N/A
Tax Free Bond Fund....... 1,217,473 -- 1,579,820 --
Total Return Fund........ 3,025,045 -- 3,087,111 --
Value Fund............... 2,976,469 -- 2,682,642
</TABLE>
+ The Strategic Income Fund commenced operations on February 28, 1997.
The Strategic Value Fund commenced operations on October 21, 1997.
* After expense reimbursement or waiver.
In previous years, prior to a change in management structure, the Funds
paid an administrative fee directly to NYLIFE Distributors Inc. as
administrator. For the period from January 1, 1997 through October 26, 1997 and
the fiscal year ended December 31, 1996 the amount of the administration fee
paid and waived and/or reimbursed by each Fund was as follows:
B-142
<PAGE> 221
<TABLE>
<CAPTION>
1/1/97 - 10/26/97 year ended 12/31/96
------------------- ---------------------
Advisory Fee Advisory Fee
Advisory Waived and/or Advisory Waived and/or
Reimbursed Fee Paid* Reimbursed Fee Paid* Reimbursed
- ---------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C>
California Tax Free Fund..... $ 44,678 $ 2,589 $ 45,307 $ 11,228
Capital Appreciation Fund.... 3,934,494 -- 3,429,258 --
Convertible Fund............. 2,710,393 -- 2,444,000 --
Equity Index Fund............ 605,767 418,496 365,118 290,022
Government Fund.............. 1,760,807 -- 2,643,801 --
High Yield Corporate Bond 6,921,965 -- 5,816,110 --
Fund......................
International Bond Fund...... 39,417 26,278 41,100 27,467
International Equity Fund.... 256,002 -- 228,066 --
Money Market Fund............ 407,638 396,862 397,071 473,155
New York Tax Free Fund....... 25,025 13,579 29,457 19,911
Strategic Income Fund+....... 61,282 40,291 N/A N/A
Strategic Value Fund+........ N/A N/A N/A N/A
Tax Free Bond Fund........... 1,217,473 -- 1,579,820 --
Total Return Fund............ 3,025,045 -- 3,087,111 --
Value Fund................... 2,976,469 -- 2,682,642 --
- -----------------------
</TABLE>
+ The Strategic Income Fund commenced operations on February 28, 1997. The
Strategic Value Fund commenced operations on October 21, 1997.
* After expense reimbursement or waiver.
DISTRIBUTION AGREEMENT
NYLIFE Distributors acts as the Principal Underwriter and Distributor of
the Funds' shares pursuant to the Distribution Agreement with the Trust dated
January 1, 1994. NYLIFE Securities Inc., an affiliated company, sells shares of
the Funds pursuant to a dealer agreement with the Distributor. The Distributor
and other broker-dealers will pay commissions to salesmen as well as the cost of
printing and mailing prospectuses to potential investors and of any advertising
incurred by them in connection with their distribution of Trust shares. In
addition, the Distributor will pay for a variety of account maintenance and
personal services to shareholders after the sale.
The Distribution Agreement for the Funds was approved by the Trustees,
including a majority of the Trustees who are not "interested persons" (as the
term is defined in the 1940 Act) of the Trust nor have any direct or indirect
financial interest in the operation of the distribution plan or in any related
agreement (the "Independent Trustees") at a meeting held on
B-143
<PAGE> 222
October 25, 1993. The Distribution Agreement for the International Bond Fund and
the International Equity Fund was approved by the Trustees, including a majority
of the Independent Trustees, at a meeting held on July 25, 1994. The
Distribution Agreement for the Strategic Income Fund was approved by the
Trustees, including a majority of the Independent Trustees at a meeting held on
January 27, 1997. The Distribution Agreement for the Strategic Value Fund was
approved by the Trustees, including a majority of the Independent Trustees, at a
meeting held on July 28, 1997. The Distribution Agreement for the Blue Chip
Growth Fund, Research Value Fund, Small Cap Value Fund, Growth Opportunities
Fund, Small Cap Growth Fund, Equity Income Fund and Global High Yield Fund was
approved by the Trustees, including a majority of the Independent Trustees, on
April 27, 1998. On that date, Distribution Agreements for the other Funds were
reapproved by the Trustees, including a majority of the Independent Trustees.
The Distribution Agreement for the MAP Equity Fund was approved by the Trustees,
including a majority of the Independent Trustees, at a meeting held on March 15,
1999.
DISTRIBUTION PLANS
Each of the Funds (except the Money Market Fund and the Equity Index
Fund, which does not offer Class B or Class C shares) has adopted separate plans
of distribution pursuant to Rule 12b-1 under the 1940 Act for each class of
shares of each Fund (the "Class A Plans," the "Class B Plans," the "Class C
Plans" and, collectively, the "Plans"). Under a Plan, a class of shares of a
Fund pays distribution and/or service fees to the Distributor as compensation
for distribution and/or service activities related to that class of shares and
its shareholders. Because these fees are paid out of a Fund's assets on an
on-going basis, over time these fees will increase the cost of an investment and
may cost a shareholder more than paying other types of sales charges. Each Plan
provides that the distribution and/or service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor.
Authorized distribution expenses include the Distributor's interest expense and
profit. The Distributor anticipates that its actual expenditures will
substantially exceed the distribution fee received by it during the early years
of the operation of a Plan. For example, the Distributor will advance to dealers
who sell Class B shares of the Funds an amount equal to 4% of the aggregate net
asset value of the shares sold. In addition, with respect to Class A and Class B
shares, the Distributor may pay dealers an ongoing annual service fee equal to
0.25% of the
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<PAGE> 223
aggregate net asset value of shares held by investors serviced by
the dealer.
The Distributor will advance to dealers who sell Class C shares of the Funds an
amount equal to 1% of the aggregate net asset value of the shares sold. After
the first full year of a Class C investment, the Distributor may make payments
quarterly to dealers in an amount up to 1.00% (0.50% for the California Tax
Free, New York Tax Free and Tax Free Bond Funds) on an annualized basis of the
average net asset value of the Class C shares which are attributable to
shareholders for whom the dealers are designated as dealers of record.
In later years, its expenditures may be less than the distribution fee, thus
enabling the Distributor to realize a profit in those years.
If the Plans for the Funds are terminated, the Funds will owe no payments to the
Distributor other than fees accrued but unpaid on the termination date.
Plan revenues may be used to reimburse third parties which provide various
services to shareholders who are participants in various retirement plans. These
services include aggregating and processing purchase and redemption orders for
participant shareholders, processing dividend payments, forwarding shareholder
communications, and recordkeeping. Persons selling or servicing different
classes of shares of the Funds may receive different compensation with respect
to one particular class of shares as opposed to another in the same Fund.
The Distributor, at its expense, also may from time to time provide additional
promotional incentives to dealers who sell Fund shares.
Under the Class A Plans, Class A shares of each Fund pay the Distributor
a monthly fee at the annual rate of 0.25% of the average daily net assets of
each Fund's Class A shares for distribution or service activities, as designated
by the Distributor. The Class A Plans for each of the Funds other than the
California Tax Free Fund, New York Tax Free Fund, Equity Index Fund, Strategic
Income Fund, Blue Chip Growth Fund, Research Value Fund, Small Cap Value Fund,
Growth Opportunities Fund, Small Cap Growth Fund, Equity Income Fund and Global
High Yield Fund, were approved by the sole initial shareholder of the Class A of
shares of each Fund on December 31, 1994. The Class A Plans were approved by the
shareholders of the California Tax Free Fund, New York Tax Free Fund and the
Equity Index Fund at a Special Meeting of Shareholders held on December 28, 1994
and the Class A Plan was
B-145
<PAGE> 224
approved by the sole initial shareholder of the Strategic Income Fund on
February 3, 1997 and by the sole initial shareholder of the Strategic Value Fund
on October 21, 1997. Regarding the California Tax Free Fund, the New York Tax
Free Fund and the Equity Index Fund, the Trustees of the Trust, including a
majority of the Independent Trustees, by vote cast in person at a meeting called
for the purpose of voting on such Plans, initially approved the Plan now
designated as the Class A Plans on July 25, 1994. Regarding the Strategic Income
Fund, the Trustees of the Trust, including a majority of the Independent
Trustees, by vote cast in person at a meeting called for the purpose of voting
on such Plan, initially approved the Class A Plan on January 27, 1997. The Class
A Plans for each of the Blue Chip Growth Fund, Research Value Fund, Small Cap
Value Fund, Growth Opportunities Fund, Small Cap Growth Fund, Equity Income Fund
and Global High Yield Fund were approved by the sole shareholder of the Class A
shares of each of those Funds on May 29, 1998. The Trustees, including a
majority of the Independent Trustees, by vote cast at a meeting called for the
purpose of voting on such plans, initially approved the Class A Plans for each
of those Funds on April 27, 1998. The Class A Plan for the MAP Equity Fund was
approved by the sole shareholder on _______, 1999. The Trustees, including a
majority of the Independent Trustees, by vote cast at a meeting called for the
purpose of voting on such plan, approved the Plan on March 15, 1999.
As noted above, the Class B shares of each Fund (except the Money Market
Fund and the Equity Index Fund, which does not offer Class B shares) also have
adopted Rule 12b-1 distribution plans. Originally, Rule 12b-1 plans of
distribution were adopted by each of the Funds (except the California Tax Free
Fund, New York Tax Free Fund and Money Market Fund) for the then sole existing
class of shares of the Funds. More specifically, Rule 12b-1 distribution plans
were approved on _______, 1999 by the sole initial Class B shareholder of the
MAP Equity Fund, May 29, 1998 by the sole initial Class B shareholder of the
Blue Chip Growth Fund, Research Value Fund, Small Cap Value Fund, Growth
Opportunities Fund, Small Cap Growth Fund, Equity Income Fund and Global High
Yield Fund, on October 21, 1997 by the sole initial Class B shareholder of the
Strategic Value Fund, on February 3, 1997 by the sole initial shareholder of the
Strategic Income Fund, on September 8, 1994 by the sole initial shareholder of
each of the International Bond Fund and International Equity Fund, on April 25,
1988 by the shareholders of the Total Return Fund, on May 29, 1987 by the sole
initial shareholder of the Tax Free Bond Fund and on April 27, 1987 by the
shareholders of the Capital Appreciation
B-146
<PAGE> 225
Fund, Convertible Fund, Government Fund, High Yield Corporate Bond Fund and
Value Fund.
The Trustees of the Trust, including a majority of the Independent
Trustees, by vote cast in person at meetings called for the purpose of voting on
such Plans, initially approved the Plans of the Total Return Fund on October 26,
1987, initially approved the Plans of the Tax Free Bond Fund on April 27, 1987,
and initially approved the Plans of the Capital Appreciation Fund, Convertible
Fund, Government Fund, High Yield Corporate Bond Fund and Value Fund on April
28, 1986. In addition, on October 31, 1988, the Trustees of the Trust, including
a majority of the Independent Trustees, amended the Tax Free Bond Fund's Plan to
permanently reduce the amount of the distribution fee to be imposed subsequent
to that date. On October 26, 1992, the Trustees of the Trust, including a
majority of the Independent Trustees, amended each of the plans of distribution
to designate a portion of total amount of the distribution fee as a service fee,
to pay for a variety of account maintenance and personal services to
shareholders after the sale. On October 25, 1993, the Trustees of the Trust,
including a majority of the Independent Trustees, amended each of the plans of
distribution to reflect that NYLIFE Distributors would serve as principal
underwriter of the Funds' shares, effective January 1, 1994. Prior to the
implementation of the multi-class distribution system the distribution plans in
effect for the Funds were amended and redesignated and, now, are applicable only
to the Class B shares of each Fund. On October 30, 1995, the Trustees of the
Trust, including a majority of the Independent Trustees, amended the Class A
Plans and the Class B Plans to clarify that the Plans contemplate payment for
expenses that may generally be characterized as administrative.
Regarding the California Tax Free Fund and New York Tax Free Fund, the
Class B Plans were approved by the sole initial shareholder of the Class B
shares of each Fund on December 31, 1994. The Trustees of the Trust, including a
majority of the Independent Trustees, by vote cast in person at meetings called
for the purpose of voting on such Plans, initially approved such Plans now
designated as the Class B Plans on October 24, 1994.
Regarding the International Bond Fund and International Equity Fund, the
Trustees of the Trust, including a majority of the Independent Trustees, by vote
cast in person at meetings called for the purpose of voting on such Plans,
initially approved the distribution plans now designated as the Class B Plans on
July 25, 1994, and the Class A Plans on October 24, 1994. The Trustees of
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<PAGE> 226
the Trust, including a majority of the Independent Trustees, by vote cast in
person at a meeting called for the purpose of voting on such Plan, initially
approved the Class B Plan of the Strategic Income Fund on January 27, 1997. The
Trustees of the Trust, including a majority of the Independent Trustees, by vote
cast in person at a meeting called for the purpose of voting on such Plan,
initially approved the Class B Plan of the Strategic Value Fund on July 28,
1997. The Trustees of the Trust, including a majority of the Independent
Trustees, by vote cast in person at a meeting called for the purpose of voting
on such Plans, initially approved the Class B Plans for the Blue Chip Growth
Fund, Research Value Fund, Small Cap Value Fund, Growth Opportunities Fund,
Small Cap Growth Fund, Equity Income Fund and Global High Yield Fund on April
27, 1998 and the Class B Plan for the * Fund on March 15, 1999.
On October 24, 1997, Class B shareholders for each of the Funds, other
than the Equity Index Fund, Money Market Fund, Strategic Income Fund and
Strategic Value Fund, approved a revision to the Class B Plans of each Fund to
revise the method of calculation of the distribution fee. The Trustees,
including a majority of the Independent Trustees, approved the revision at an
in-person meeting held July 28, 1997. The Class B shareholders approved the
revision at a meeting held October 24, 1997.
Under the current Class B plans, each Fund's Class B shares pay a monthly
distribution fee to the Distributor at the annual rate of 0.75% (0.25% in the
case of the California Tax Free Fund, New York Tax Free Fund and the Tax Free
Bond Fund) of the average daily net assets attributable to the Fund's Class B
shares. Pursuant to the Class B Plan, the Class B shares also pay a service fee
to the Distributor at the annual rate of 0.25% of the average daily net assets
of the Funds' Class B shares.
The Class C shares of each Fund (except the Money Market Fund and the
Equity Index Fund, which does not offer Class C shares) also have adopted Rule
12b-1 distribution plans. The Trustees of the Trust, including a majority of the
Independent Trustees, by vote cast in person at a meeting called for the purpose
of voting on such Plans, initially approved the Class C Plans of the Funds on
July 27, 1998.
Regarding the MAP Equity Fund, the sole initial Class C shareholder
approved the Class C Plan on ________, 1999 and the Trustees of the Trust,
including a majority of the Independent Trustees, by vote cast in person at a
meeting called for the
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<PAGE> 227
purpose of voting on the Plan, initially approved the Class C Plan on March 15,
1999.
Under the Class C plans, each Fund's Class C shares pay a monthly
distribution fee to the Distributor at the annual rate of 0.75% (0.50% in the
case of the California Tax Free Fund, New York Tax Free Fund and the Tax Free
Bond Fund) of the average daily net assets attributable to the Fund's Class C
shares. Pursuant to the Class C Plans, the Class C shares also pay a service fee
to the Distributor at the annual rate of 0.25% of the average daily net assets
of the Funds' Class C shares.
Class I shares do not have a 12b-1 plan.
Each Plan shall continue in effect from year to year, provided such
continuance is approved annually by a vote of the Trustees in the manner
described above. No Plan may be amended to increase materially the amount to be
spent for the services described therein without approval of the shareholders of
the affected class of shares of a Fund, and all material amendments of each Plan
must also be approved by the Trustees in the manner described above. Each Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent Trustees, or by a vote of a majority of the
outstanding voting securities of the affected Fund (as defined in the 1940 Act)
on not more than 30 days' written notice to any other party to the Plan. So long
as any Plan is in effect, the selection and nomination of Trustees who are not
such interested persons has been committed to those Trustees who are not such
interested persons. The Trustees have determined that, in their judgment, there
is a reasonable likelihood that each Plan will benefit the respective Fund and
its shareholders. Pursuant to the Class A, Class B and Class C Plans, the
Distributor shall provide the Trust for review by the Trustees, and the Trustees
shall review at least quarterly, a written report of the amounts expended under
each Plan and the purpose for which such expenditures were made. In the
Trustees' quarterly review of each Plan, they will consider its continued
appropriateness and the level of compensation provided therein.
Pursuant to a rule of the National Association of Securities Dealers,
Inc., the amount which a Fund may pay for distribution expenses, excluding
service fees, is limited to 6.25% of the gross sales of the Fund's shares since
inception of the Fund's Plan, plus interest at the prime rate plus 1% per annum
(less any contingent
B-149
<PAGE> 228
deferred sales charges paid by shareholders to the Distributor or distribution
fee (other than service fees) paid by the Funds to the Distributor).
For the fiscal year ended December 31, 1998, the Funds paid distribution
and service fees pursuant to the Class A, Class B and Class C Plans as follows
(Class C shares were not offered prior to September 1, 1998):
<TABLE>
<CAPTION>
Amount of Fee Amount of Fee Amount of fee
Pursuant to Pursuant to Pursuant to
Class A Plan Class B Plan Class C Plans +
------------- ------------- ---------------
<S> <C> <C> <C>
Blue Chip Growth Fund............
California Tax Free Fund.........
Capital Appreciation Fund........
Convertible Fund.................
Equity Income Fund...............
Equity Index Fund................
Global High Yield Fund...........
Government Fund..................
Growth Opportunities Fund........
High Yield Corporate Bond Fund...
International Bond Fund..........
International Equity Fund........
Money Market Fund................
New York Tax Free Fund...........
Research Value Fund..............
Small Cap Growth Fund............
Small Cap Value Fund.............
Strategic Income Fund............
Strategic Value Fund.............
Tax Free Bond Fund...............
Total Return Fund................
Value Fund.......................
</TABLE>
- -----------------------
+ The Class C Plans became effective September 1, 1998.
For the fiscal year ended December 31, 1998, 1997 and 1996, NYLIFE
Distributors retained the following amounts in sales charges for sales of Class
A shares of the Funds:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Blue Chip Growth Fund........
California Tax Free Fund..... $ 6,958 $ 35,009
Capital Appreciation Fund.... 201,562 1,430,417
Convertible Fund............. 39,646 903,782
Equity Income Fund...........
Equity Index Fund............ 329,059 1,968,993
Global High Yield Fund.......
Government Fund+............. 5,803 96,545
Growth Opportunities Fund....
High Yield Corporate Bond
Fund..................... 308,282 1,413,313
International Bond Fund...... 5,235 54,586
</TABLE>
B-150
<PAGE> 229
<TABLE>
<S> <C> <C>
International Equity Fund.... 121,009 91,571
Money Market Fund............ N/A N/A
New York Tax Free Fund....... 2,297 22,774
Research Value Fund..........
Small Cap Growth Fund........
Small Cap Value Fund.........
Strategic Income Fund........ 14,008 N/A
Strategic Value Fund......... 344 N/A
Tax Free Bond Fund........... 5,710 51,345
Total Return Fund............ 50,232 334,470
Value Fund+.................. 112,844 574,807
</TABLE>
- -----------------------
For the fiscal years ended December 31, 1998, 1997 and 1996, contingent
deferred sales charges were paid by investors on the redemption of Class B
shares of each Fund, as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Blue Chip Growth Fund ...........
California Tax Free Fund......... $ 3,586 $ 2,008
Capital Appreciation Fund........ 1,485,899 966,555
Convertible Fund................. 1,466,588 852,359
Equity Income Fund...............
Equity Index Fund................ N/A N/A
Global High Yield Fund...........
Government Fund.................. 788,647 952,234
Growth Opportunities Fund........
High Yield Corporate Bond Fund... 2,684,352 1,482,294
International Bond Fund.......... 31,152 27,332
International Equity Fund........ 88,010 48,979
Money Market Fund+............... 779,844 640,623
New York Tax Free Fund........... 2,531 2,810
Research Value Fund..............
Small Cap Growth Fund............
Small Cap Value Fund.............
Strategic Income Fund++.......... 11,479 N/A
Strategic Value Fund++........... -- N/A
Tax Free Bond Fund............... 492,542 605,386
Total Return Fund................ 871,336 745,382
Value Fund....................... 996,052 712,915
</TABLE>
- -----------------------
+ The amount shown represents proceeds from contingent deferred sales
charges which were assessed on redemptions of shares which had previously
been exchanged from other Funds into the Money Market Fund.
++ The Strategic Income Fund commenced operations on February 28, 1997. The
Strategic Value Fund commenced operations on October 21, 1997.
For the fiscal year ended December 31, 1998, it is estimated that the
following amounts were spent on compensation to dealers with respect to the
Class A shares of each Fund: Blue Chip Growth Fund spent $________;California
Tax Free Fund spent $_______;
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<PAGE> 230
Capital Appreciation Fund spent $_________; Convertible Fund spent $________;
Equity Income spent $_________;Equity Index Fund spent $________; Global High
Yield Fund spent $_________; Government Fund spent $_________; Growth
Opportunities Fund spent $__________; High Yield Corporate Bond Fund spent
$___________; International Bond Fund spent $_________; International Equity
Fund spent $_________; New York Tax Free Fund spent $_______; Research Value
Fund spent $__________; Small Cap Growth Fund spent $________; Small Cap Value
Fund spent $___________; Strategic Income Fund spent $________; Strategic Value
Fund spent $_______ Tax Free Bond Fund spent $_______; Total Return Fund spent
$________; and Value Fund spent $_________.
For the fiscal period ended December 31, 1998, it is estimated that the
following amounts were spent for distribution-related activities with respect to
the Class C shares of each Fund:*
<TABLE>
<CAPTION>
Approximate
Printing And Total Amount
Mailing Spent by
Sales Prospectuses to Compensation NYLIFE
Material other than to Compensation Sales Distributors
and Current Distribution to Sales Distribution With Respect
Advertising Shareholders Personnel Personnel Other Costs to Each Fund
----------- ------------ --------- --------- ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Blue Chip Growth Fund
California Tax Free
Fund
Capital Appreciation
Fund
Convertible Fund
Equity Income Fund
Global High Yield
Fund
Govt. Fund
Growth Opportunities
Fund
High Yield Corp. Fund
International Bond
Fund
International Equity
Fund
New York Tax Free
Fund
Research Value Fund
Small Cap Growth Fund
Small Cap Value Fund
Tax Free Fund
Total Return Fund
Value Fund
Strategic Income
Fund
Strategic Value Fund
===================================================================================================================================
Total
===================================================================================================================================
</TABLE>
*The Class C Shares were first offered on September 1, 1998
B-152
<PAGE> 231
OTHER SERVICES
Pursuant to an Accounting Agreement with the Trust, dated October 24,
1997, the Manager performs certain bookkeeping and pricing services for the
Funds. Each Fund will bear an allocable portion of the cost of providing these
services to the Trust.
For the fiscal year ended December 31, 1998 and the period from October
27, 1997 through December 31, 1997, the amount of recordkeeping fees paid to the
Manager by each Fund was as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1998 10/27/97 - 12/31/97
----------------- -------------------
<S> <C> <C>
Blue Chip Growth Fund........
California Tax Free Fund..... N/A
Capital Appreciation Fund.... 41,466
Convertible Fund............. 21,595
Equity Income Fund...........
Equity Index Fund............ N/A
Global High Yield Fund.......
Government Fund.............. 16,639
Growth Opportunities Fund....
High Yield Corporate Bond
Fund..................... 68,994
International Bond Fund...... 2,608
International Equity Fund.... 5,460
Money Market Fund............ 12,407
New York Tax Free Fund....... N/A
Research Value Fund..........
Small Cap Growth Fund........
Small Cap Value Fund.........
Strategic Income Fund........ 4,701
Strategic Value Fund......... 2,323
Tax Free Bond Fund........... 13,665
Total Return Fund............ 28,016
Value Fund................... 31,142
</TABLE>
For the period January 1, 1997 through October 26, 1997 and the fiscal
year ended December 31, 1996, the amount of recordkeeping fee paid to NYLIFE
Distributors, the previous Accounting Agent, by each Fund was as follows:
<TABLE>
<CAPTION>
Period 1/1/97 - Year Ended
10/26/97 December 31, 1996
-------- -----------------
<S> <C> <C>
California Tax Free Fund............................ $ N/A $ N/A
Capital Appreciation Fund........................... 164,868 145,721
Convertible Fund.................................... 108,332 81,568
Equity Index Fund................................... N/A N/A
Government Fund..................................... 80,879 114,622
High Yield Corporate Bond Fund...................... 270,515 233,333
</TABLE>
B-153
<PAGE> 232
<TABLE>
<S> <C> <C>
International Bond Fund............................. 11,358 12,511
International Equity Fund........................... 24,683 22,075
Money Market Fund................................... 54,915 62,593
New York Tax Free Fund.............................. N/A N/A
Strategic Income Fund +............................. 13,624 N/A
Strategic Value Fund +.............................. N/A N/A
Tax Free Bond Fund.................................. 60,703 80,430
Total Return Fund................................... 119,962 126,154
Value Fund.......................................... 125,541 16,985
</TABLE>
- ----------------
+ The Strategic Income Fund commenced operations on February 28, 1997.
The Strategic Value Fund commenced operation on October 21, 1997.
In addition, each Fund may reimburse NYLIFE Securities, NYLIFE
Distributors and MainStay Shareholder Services for the cost of certain
correspondence to shareholders and the establishment of shareholder accounts.
EXPENSES BORNE BY THE TRUST
Except for the expenses to be paid by the Manager as described in the
Prospectus, the Trust, on behalf of each Fund, is responsible under its
Management Agreement for the payment of expenses related to each Fund's
operations, including (I) the fees payable to the Manager, (ii) the fees and
expenses of Trustees who are not affiliated with the Manager or Sub-Advisers,
(iii) certain fees and expenses of the Trust's Custodians and Transfer Agent,
(iv) the charges and expenses of the Trust's legal counsel and independent
accountants, (v) brokers' commissions and any issue or transfer taxes chargeable
to the Trust, on behalf of a Fund, in connection with its securities
transactions, (vi) the fees of any trade association of which a Fund or the
Trust is a member, (vii) the cost of share certificates representing shares of a
Fund, (viii) reimbursement of a portion of the organization expenses of a Fund
and the fees and expenses involved in registering and maintaining registration
of the Trust and of its shares with the SEC and registering the Trust as a
broker or dealer and qualifying its shares under state securities laws,
including the preparation and printing of the Trust's registration statements
and prospectuses for such purposes, (ix) allocable communications expenses with
respect to investor services and all expenses of shareholders' and Trustees'
meetings and preparing, printing and mailing prospectuses and reports to
shareholders, (x) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of a Fund's business,
(xi) any
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<PAGE> 233
expenses assumed by the Fund pursuant to its plan of distribution, (xii) all
taxes and business fees payable by a Fund to federal, state or other
governmental agencies, and (xiii) costs associated with the pricing of the
Funds' shares. Fees and expenses of legal counsel, registering shares, holding
meetings and communicating with shareholders include an allocable portion of the
cost of maintaining an internal legal and compliance department.
Certain of the Funds have entered into a committed line of credit with
The Bank of New York as agent, and various other lenders from whom a Fund may
borrow up to 5% of its net assets in order to honor redemptions. The credit
facility is expected to be utilized in periods when the Funds experience
unusually large redemption requests.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Purchases and sales of securities on a securities exchange are effected
by brokers, and the Funds pay a brokerage commission for this service. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on many foreign stock exchanges these commissions are fixed.
In the over-the-counter markets, securities (i.e., Municipal Bonds and other
debt securities) are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. Transactions in certain
over-the-counter securities also may be effected on an agency basis, when the
total price paid (including commission) is equal to or better than the best
total prices available from other sources. In underwritten offerings, securities
are purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
On occasion, certain money market instruments may be purchased directly from an
issuer, in which case no commissions or discounts are paid.
Regarding the California Tax Free Fund and New York Tax Free Fund, newly
issued securities normally are purchased directly from the issuer or from an
underwriter acting as principal. Other purchases and sales usually are placed
with those dealers from which it appears that the best price or execution will
be obtained; those dealers may be acting as either agents or principals. The
purchase price paid by a Fund to underwriters of newly issued securities usually
includes a concession paid by the
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issuer to the underwriter, and purchases of after-market securities from dealers
normally are executed at a price between the bid and asked prices.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Sub-Advisers attempt to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of each Fund and
their other clients on the basis of the broker-dealers' professional capability,
the value and quality of their brokerage services and the level of their
brokerage commissions. Consistent with the foregoing primary considerations, the
Conduct Rules of the NASD and such other policies as the Trustees may determine,
the Sub-Advisers may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute the Funds' portfolio transactions.
NYLIFE Securities (the "Affiliated Broker") may act as broker for the
Trust. In order for the Affiliated Broker to effect any portfolio transactions
for the Trust on an exchange, the commissions, fees or other remuneration
received by the Affiliated Broker must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time. This standard would allow the
Affiliated Broker to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arms-length
transaction. The Trust will not deal with the Affiliated Broker in any portfolio
transaction in which the Affiliated Broker acts as principal.
Under each Sub-Advisory Agreement and as permitted by Section 28(e) of
the Securities Exchange Act of 1934 (the "1934 Act"), a Sub-Adviser may cause a
Fund to pay a broker-dealer (except the Affiliated Broker) which provides
brokerage and research services to the Sub-Adviser an amount of commission for
effecting a securities transaction for a Fund in excess of the amount other
broker-dealers would have charged for the transaction if the Sub-Adviser
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or the
Sub-Adviser's overall responsibilities to the Trust or to its other clients. The
term
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"brokerage and research services" includes advice as to the value of securities,
the advisability of investing in, purchasing, or selling securities, and the
availability of securities or of purchasers or sellers of securities; furnishing
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts; and
effecting securities transactions and performing functions incidental thereto
such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Sub-Advisers, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might charge
may be paid to broker-dealers (except the Affiliated Broker) who were selected
to execute transactions on behalf of the Trust and the Sub-Advisers' other
clients in part for providing advice as to the availability of securities or of
purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Sub-Advisers for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold through such broker-dealers, but at present, unless otherwise
directed by the Trust, a commission higher than one charged elsewhere will not
be paid to such a firm solely because it provided Research to an Sub-Adviser.
Research provided by brokers is used for the benefit of all of the Sub-Advisers'
clients and not solely or necessarily for the benefit of the Trust. The
Sub-Advisers' investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Sub-Advisers as a consideration in the selection of brokers to execute portfolio
transactions.
In certain instances there may be securities which are suitable for a
Fund's portfolio as well as for that of another Fund or one or more of the other
clients of the Sub-Advisers. Investment decisions for a Fund and for the
Sub-Advisers' other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold for,
other clients. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive
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investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client. When
two or more clients are simultaneously engaged in the purchase or sale of the
same security, the securities are allocated among clients in a manner believed
to be equitable to each. It is recognized that in some cases this system could
have a detrimental effect on the price or volume of the security in a particular
transaction as far as a Fund is concerned. The Trust believes that over time its
ability to participate in volume transactions will produce better executions for
the Funds.
The Sub-Advisory fee that the Manager pays on behalf of each Fund to the
Sub-Advisers will not be reduced as a consequence of the Sub-Advisers' receipt
of brokerage and research services. To the extent a Fund's portfolio
transactions are used to obtain such services, the brokerage commissions paid by
the Fund will exceed those that might otherwise be paid, by an amount which
cannot be presently determined. Such services would be useful and of value to
the Sub-Advisers in serving both the Funds and other clients and, conversely,
such services obtained by the placement of brokerage business of other clients
would be useful to the Sub-Advisers in carrying out their obligations to the
Funds.
For the fiscal years ended December 31, 1998, 1997 and 1996 each of the
following Funds paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Brokerage Total Brokerage Commissions
Commissions Paid Paid to Affiliated Persons
---------------- --------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Blue Chip Growth Fund..........
Capital Appreciation Fund...... 1,349,716 $ 882,877 $ --- $ ---
Convertible Fund............... 1,728,411 1,952,991 --- ---
Equity Income Fund.............
Equity Index Fund.............. 24,704 63,111 --- ---
Global High Yield Fund.........
Government Fund................ 1,719 20,809 --- ---
Growth Opportunities Fund......
High Yield Corporate Bond
Fund......................... 1,297,005 1,187,150 --- International
Equity Fund...... 239,373 215,696 --- ---
Research Value Fund............
Small Cap Growth Fund..........
Small Cap Value Fund...........
Strategic Income Fund+......... 11,739 N/A --- N/A
Strategic Value Fund+.......... 21,314 N/A --- N/A
Total Return Fund.............. 609,009 339,858 --- ---
Value Fund..................... 2,347,711 1,354,707 ---
</TABLE>
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<TABLE>
<CAPTION>
Total Brokerage
Commissions Paid
Total Amount of Transactions to Brokers that
Where Commissions Paid Provided Research
---------------------------------------------------------------- -----------------
Year Ended Year Ended Year Ended Year ended
December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Blue Chip Growth Fund..........
Capital Appreciation Fund...... 987,618,526 $ 571,478,397(0.0%)(2)
Convertible Fund............... 1,608,359,897 1,296,465,108(0.0%)(2)
Equity Income Fund.............
Equity Index Fund.............. 21,111,250 64,348,135(0.0%)(2)
Global High Yield Fund.........
Government Fund................ 12,111,250 275,083,720(0.0%)(2)
Growth Opportunities Fund......
High Yield Corporate Bond
Fund......................... 1,451,737,826 2,471,387,854(0.0%)(2)
International Equity Fund...... 60,462,344 49,098,906(0.0%)(2)
Research Value Fund............
Small Cap Growth Fund..........
Small Cap Value Fund...........
Strategic Income Fund+......... 41,537,454 N/A
Strategic Value Fund+.......... 12,723,841 N/A
Total Return Fund ............. 459,057,404 271,187,968(0.0%)(2)
Value Fund .................... 1,523,756,743 848,170,710(0,0%)(2)
</TABLE>
- -------------------------
(1) Percent of total commissions paid.
(2) Percent of total transactions involving the payment of commissions
effected through affiliated persons.
+ The Strategic Income Fund commenced operations on February 28, 1997.
The Strategic Value Fund commenced operations on October 21, 1997.
The California Tax Free Fund, International Bond Fund, Money Market Fund,
New York Tax Free Fund and Tax Free Bond Fund paid no brokerage commissions
during the fiscal years ended December 31, 1998, 1997 and 1996.
[Capital Appreciation Fund held commercial paper of American Express
Credit Corp. valued at $_______ and commercial paper of Prudential Funding Corp.
valued at $_______; Equity Index Fund held common stock in Merrill Lynch & Co.,
Inc. valued at $_______, common stock of Schwab (Charles) Corp. valued at
$_______, common stock of American Express Co. valued at $_______ and common
stock of Morgan Stanley, Dean Witter, Discover & Co. valued at $_______;
International Equity Fund held commercial paper of Merrill Lynch & Co. Inc.
valued at $_______ and common stock of HSBC Holdings PLC valued $_______;
Convertible Fund held commercial paper of American Express Credit Corp. Valued
at $_______, and common stock and preferred stock of Merrill Lynch & Co., Inc.
valued at $_______ and $_______, respectively; Total Return Fund held commercial
paper of American Express Credit Corp. valued at $_______, and bonds of Lehman
Brothers Holdings Inc., 7.375%, due
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<PAGE> 238
5/15/07, valued at $_______; Value Fund held commercial paper of American
Express Credit Corp. valued at $_______ and commercial paper of Prudential
Funding Corp. valued at $_______; Government Fund held commercial paper of
American Express Credit Corp. valued at $_______ and commercial paper of
Prudential Funding Corp. Valued at $_______; High Yield Corporate Bond Fund held
commercial paper of American Express Credit Corp. valued at $_______ and
commercial paper of Prudential Funding Corp. valued at $_______; Money Market
Fund held commercial paper of American Express Credit Corp. valued at $_______
and commercial paper of Goldman Sachs Group L.P. valued at $_______; Strategic
Income Fund held commercial paper of American Express Credit Corp. valued at
$_______, bonds of Lehman Large Loan, Series 1997-LL1 Class A, 6.79%, due
6/12/04, valued at $_______ and bonds of Merrill Lynch Mortgage Investors, Inc.,
Series 1995-C2 Class A1, 7.1817%, due 6/15/21, valued at $_______; and Strategic
Value Fund held commercial paper of American Express Credit Corp. valued at
$_______ and commercial paper of Prudential Funding Corp. valued at $_______.]
Investors may, subject to the approval of the Trust, the Manager and the
Sub-Adviser, purchase shares of a Fund with liquid securities that are eligible
for purchase by that Fund and that have a value that is readily ascertainable.
These transactions will be effected only if the Sub-Adviser intends to retain
the security in the Fund as an investment. The Trust reserves the right to amend
or terminate this practice at any time.
NET ASSET VALUE
The net asset value per share of each Fund (other than the Money Market
Fund) is determined by the Trust daily as of the close of regular trading on the
New York Stock Exchange (currently 4:00 p.m., Eastern time) on each day when the
New York Stock Exchange is open for trading. The net asset value per share of
the Money Market Fund is also determined at noon on such days.
Portfolio securities of the Money Market Fund are valued at their
amortized cost, which does not take into account unrealized securities gains or
losses. While this method provides certainty in valuation, it may result in
periods during which value, as determined by amortized cost, is higher or lower
than the price the Money Market Fund would receive if it sold the instrument.
During periods of declining interest rates, the quoted yield on shares of the
Money Market Fund may tend to be higher than a like computation made by a fund
with identical investments utilizing a
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<PAGE> 239
method of valuation based upon market prices and estimates of market prices for
all of its portfolio instruments. Thus, if the use of amortized cost by the
Money Market Fund resulted in a lower aggregate portfolio value on a particular
day, a prospective investor in the Money Market Fund would be able to obtain a
somewhat higher yield if he or she purchased shares of the Money Market Fund on
that day, than would result from investment in a fund utilizing solely market
values, and existing investors in the Money Market Fund would receive less
investment income. The converse would apply in a period of rising interest
rates.
Portfolio securities of each other Fund are valued (a) by appraising
common and preferred stocks which are traded on the New York Stock Exchange at
the last sale price on that Exchange on the day as of which assets are valued
or, if no sale occurs, at the mean between the closing bid price and asked
price, (b) by appraising other common and preferred stocks as nearly as possible
in the manner described in clause (a) if traded on any other ex change,
including the National Association of Securities Dealers National Market System
and foreign securities exchanges, (c) by appraising over-the-counter common and
preferred stocks quoted on the National Association of Securities Dealers NASDAQ
system (but not listed on the National Market System) at the closing bid price
supplied through such system, (d) by appraising over-the-counter common and
preferred stocks not quoted on the NASDAQ system and securities listed or traded
on certain foreign exchanges whose operations are similar to the U.S.
over-the-counter market at prices supplied by a pricing agent selected by the
Sub-Adviser if those prices are deemed by the Sub-Adviser to be representative
of market values at the first close of business of the New York Stock Exchange,
(e) by appraising debt securities at prices supplied by a pricing agent selected
by the Sub-Adviser, which prices reflect broker-dealer-supplied valuations and
electronic data processing techniques if those prices are deemed by the
Sub-Adviser to be representative of market values at the first close of business
of the New York Stock Exchange, (f) by appraising exchange-traded options and
futures contracts at the last posted settlement price on the market where any
such option or futures contract is principally traded and (g) by appraising all
other securities and other assets, including over-the-counter common and
preferred stocks not quoted on the NASDAQ system, securities listed or traded on
certain foreign exchanges whose operations are similar to the U.S.
over-the-counter market and debt securities for which prices are supplied by a
pricing agent but are not deemed by the Sub-Adviser to be representative of
market values, but excluding money market instruments with a remaining maturity
of 60 days or
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less and including restricted securities and securities for which no market
quotation is available, at fair value in accordance with procedures approved by
and determined in good faith by the Trustees, although the actual calculation
may be done by others. Money market instruments held by the Funds with a
remaining maturity of 60 days or less will be valued by the amortized cost
method unless such method does not represent fair value. Forward foreign
currency exchange contracts held by the Funds are valued at their respective
fair market values determined on the basis of the mean between the last current
bid and asked prices based on dealer or exchange quotations.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at the last sale price on the
business day as of which such value is being determined at the close of the
exchange representing the principal market for such securities. The value of all
assets and liabilities expressed in foreign currencies will be converted into
U.S. dollar values at the mean between the buying and selling rates of such
currencies against U.S. dollars last quoted by any major bank or broker-dealer.
If such quotations are not available, the rate of exchange will be determined in
accordance with policies established by the Trustees. The Trust recognizes
dividend income and other distributions on the ex-dividend date, except that
certain dividends from foreign securities are recognized as soon as the Trust
is informed after the ex-dividend date.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the New York
Stock Exchange is open for trading). In addition, European or Far Eastern
securities trading generally in a particular country or countries may not take
place on all business days in New York. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign markets on days
which are not business days in New York and on which the Funds' net asset values
are not calculated. Such calculation of net asset value does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation.
Events affecting the values of portfolio securities that occur between
the time their prices are determined and the close of the New York Stock
Exchange generally will not be reflected in the Funds' calculation of net asset
values. However, a Sub-Adviser, in consultation with the Manager, may, in their
judgement,
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<PAGE> 241
determine that an adjustment to a Fund's net asset value should be made because
intervening events have caused the Fund's net asset value to be materially
inaccurate.
Because the Guarantee regarding the Equity Index Fund is payable to
shareholders directly (and not payable to the Equity Index Fund), and because it
represents only a contingent liability rather than an agreement to pay a
definite amount on the Guarantee Date, the Trustees believe that the Guarantee
should have no impact in determining the Equity Index Fund's net asset value.
The proceeds received by each Fund for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to such Fund and constitute the underlying assets of that Fund. The underlying
assets of each Fund will be segregated on the books of account, and will be
charged with the liabilities in respect to such Fund and with a share of the
general liabilities of the Trust. Expenses with respect to any two or more Funds
will be allocated in proportion to the net asset values of the respective Funds
except where allocations of direct expenses can otherwise be fairly made.
To the extent that any newly organized fund or class of shares receives,
on or before December 31, any seed capital, the net asset value of such fund(s)
or class(es) will be calculated as of December 31.
SHAREHOLDER INVESTMENT ACCOUNT
A Shareholder Investment Account is established for each investor in the
Funds, under which a record of the shares of each Fund held is maintained by the
Transfer Agent. If a share certificate is desired, it must be requested in
writing for each transaction. There is no charge to the investor for issuance of
a certificate. Whenever a transaction takes place in a Fund (other than the
Money Market Fund), the shareholder will be mailed a confirmation showing the
transaction. Shareholders will be sent a quarterly statement showing the status
of the Account. In addition, shareholders will be sent a monthly statement for
each month in which a transaction occurs.
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<PAGE> 242
SHAREHOLDER SERVICING AGENT
The Glass-Steagall Act prohibits national banks from engaging in the
business of underwriting, selling or distributing securities. There is currently
no precedent prohibiting banks from performing shareholder servicing and
recordkeeping functions. Changes in federal or state statutes and regulations
pertaining to the permissible activities of banks and their affiliates or
subsidiaries, as well as further judicial or administrative decisions or
interpretations of those provisions, could prevent a bank from continuing to
perform all or a part of such services. If a bank were prohibited from so
acting, the Trustees would consider what actions, if any, would be necessary to
continue to provide efficient and effective shareholder services. It is not
expected that shareholders would suffer any adverse financial consequences as a
result of any of these occurrences.
PURCHASE, REDEMPTION, EXCHANGES AND REPURCHASE
HOW TO PURCHASE SHARES OF THE FUNDS
GENERAL INFORMATION
The three classes of shares each represent an interest in the same portfolio of
investments of each Fund, have the same rights and are identical in all
respects, except that, to the extent applicable, each class bears its own
service and distribution expenses and may bear incremental transfer agency costs
resulting from such sales arrangement. Each class of each Fund has exclusive
voting rights with respect to provisions of the Rule 12b-1 plan for such class
of a Fund pursuant to which its distribution and service fees are paid, and each
class has similar exchange privileges. The net income attributable to Class B
and Class C shares and the dividends payable on Class B and Class C shares will
be reduced by the amount of the higher Rule 12b-1 fee and incremental expenses
associated with such class. Likewise, the NAV of the Class B and Class C shares
generally will be reduced by such class specific expenses (to the extent the
Fund has undistributed net income) and investment performance of Class B and
Class C shares will be less competitive than that of Class A shares. For
additional information on the features of Class A, Class B and Class C shares,
see "Alternative Sales Arrangements."
BY MAIL
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<PAGE> 243
Initial purchases of shares of the Funds should be made by mailing the completed
application form to the investor's Registered Representative. Shares of any
Fund, except the Money Market Fund, may be purchased at the NAV per share plus
any applicable sales charge next determined after receipt in good order of the
purchase order by that Fund plus any applicable sales charge. In the case of the
Money Market Fund (which seeks to maintain a constant net asset value of $1.00
per share), the share purchase is effected as of the NAV next determined after
receipt in good order of the purchase order by MSS.
BY TELEPHONE
For all Funds, other than the Money Market Fund, an investor may make an initial
investment by having his or her Registered Representative telephone MSS between
9:00 AM and 4:00 PM, Eastern time, on any day the New York Stock Exchange is
open. The purchase will be effected at the NAV per share plus any applicable
sales charge next determined following receipt of the telephone order as
described above. An application and payment must be received in good order by
MSS within three business days. All telephone calls are recorded to protect
shareholders and MSS. For a description of certain limitations on the liability
of the Funds and MSS for transactions effected by telephone, see "Know How to
Sell and Exchange Shares."
BY WIRE
An investor may open an account and invest by wire by having his or her
Registered Representative telephone MSS between 9:00 AM and 4:00 PM, Eastern
time, to obtain an account number and instructions. For both initial and
subsequent investments, federal funds should be wired to:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
ABA No.: 011 0000 28
Attn.: Custody and Shareholder Services
For Credit: MainStay________________Fund-Class______
Shareholder Account No.____________________________
Shareholder Registration ____________________________
DDA Account Number 99029415
An application must be received by MSS within three business days. The
investor's bank may charge the investor a fee for the wire.
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<PAGE> 244
To make a purchase effective the same day, the Registered Representative must
call MSS by 12:00 noon Eastern time, and federal funds must be received by the
Shareholder Servicing Agent before 4:00 PM Eastern time.
Wiring money to the Trust will reduce the time a shareholder must wait before
redeeming or exchanging shares because, when a shareholder purchases by check,
the Trust will withhold payment for up to 10 days of purchase or until the check
clears, whichever is first.
ADDITIONAL INVESTMENTS
Additional investments in a Fund may be made at any time by mailing a check
payable to The MainStay Funds, P.O. Box 8401, Boston, Massachusetts 02266-8401.
The shareholder's account number and the name of the Fund and class of shares
must be included with each investment. Purchases will be effected at the NAV per
share plus any applicable sales charge as described above.
SYSTEMATIC INVESTMENT PLANS
The Trust's officers may waive the initial and subsequent investment minimums
for certain purchases when they deem it appropriate, including, but not limited
to, purchases by certain qualified retirement plans, New York Life employee and
agent investment plans, investments resulting from distributions by other New
York Life products and NYLIFE Distributors products, and purchases by certain
individual participants.
Investors whose bank is a member of the Automated Clearing House ("ACH") may
purchase shares of a Fund through AutoInvest. AutoInvest facilitates
investments by using electronic debits, authorized by the shareholder, to a
checking or savings account, for share purchases. When the authorization is
accepted (usually within two weeks of receipt) a shareholder may purchase
shares by calling MSS, toll free at 1-800-MAINSTAY (between 8:00 AM and 4:00
PM, Eastern time). The investment will be effected at the NAV per share next
determined after receipt in good order of the order, plus any applicable sales
charge, and normally will be credited to the shareholder's Fund account within
two business days thereafter. Shareholders whose bank is an ACH member also may
use AutoInvest to automatically purchase shares of a Fund on a scheduled basis
by electronic debit for an account designated by the shareholder on an
application form. The initial investment must be in accordance with the
investment amounts previously mentioned. Subsequent minimum investments are $50
monthly, $100
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quarterly, $250 semiannually, or $500 annually. The investment day may be any
day from the first through the twenty-eighth of the respective month. Redemption
proceeds from Fund shares purchased by AutoInvest may not be paid until 10 days
or more after the purchase date. Fund shares may not be redeemed by AutoInvest.
OTHER INFORMATION
Investors may, subject to the approval of the Trust, the Distributor, the
Manager and the Sub-Adviser to the particular Fund, purchase shares of a Fund
with liquid securities that are eligible for purchase by that Fund and that have
a value that is readily ascertainable. These transactions will be effected only
if the Sub-Adviser intends to retain the security in the Fund as an investment.
The Trust reserves the right to amend or terminate this practice at any time. An
investor must call MAINSTAY at 1- 800-MAINSTAY before sending any securities.
An investor in certain qualified retirement plans may open an account with a
minimum investment of a lesser amount when permitted under such qualified
retirement plan. The Trust and the Distributor reserve the right to redeem
shares of any shareholder who has failed to provide the Trust with a certified
Taxpayer I.D. number or such other tax-related certifications as the Trust may
require. A notice of redemption, sent by first class mail to the shareholder's
address of record, will fix a date not less than 30 days after the mailing date,
and shares will be redeemed at the NAV determined as of the close of business on
that date unless a certified Taxpayer I.D. number (or such other information as
the Trust has requested) has been provided.
ALTERNATIVE SALES ARRANGEMENTS
INITIAL SALES CHARGE ALTERNATIVE CLASS A SHARES
The sales charge on Class A shares of the Funds is a variable percentage of the
public offering price depending upon the investment orientation of the Fund and
the amount of the sale.
The sales charge applicable to an investment in Class A shares of the Blue Chip
Growth Fund, Capital Appreciation Fund, Convertible Fund, Growth Opportunities
Fund, International Equity Fund, MAP Equity Fund, Research Value Fund, Small Cap
Growth Fund, Small Cap Value Fund, Strategic Value Fund, Total Return Fund and
Value Fund will be determined according to the following table:
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<PAGE> 246
<TABLE>
<CAPTION>
Sales Charge as
Sales Charge as a Percentage of
a Percentage of: Offering Price:
Net Retained
Amount of Offering Amount Retained by the
Purchase Price Invested by Dealer Distributor
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $50,000 5.50% 5.82% 4.75% 0.75%
$50,000 to $99,999 4.50% 4.71% 4.00% 0.50%
$100,000 to $249,999 3.50% 3.63% 3.00% 0.50%
$250,000 to $499,999 2.50% 2.56% 2.00% 0.50%
$500,000 to $999,999 2.00% 2.04% 1.75% 0.25%
$1,000,000 or more* None None See Below* None
</TABLE>
The sales charge applicable to an investment in Class A shares of the California
Tax Free Fund, Global High Yield Fund, Government Fund, High Yield Corporate
Bond Fund, International Bond Fund, New York Tax Free Fund, Strategic Income
Fund and Tax Free Bond Fund will be determined according to the following table:
<TABLE>
<CAPTION>
Sales Charge as
Sales Charge as a Percentage of
a Percentage of: Offering Price:
Net Retained
Amount of Offering Amount Retained by the
Purchase Price Invested by Dealer Distributor
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00% 0.50%
$100,000 to $249,999 3.50% 3.63% 3.00% 0.50%
$250,000 to $499,999 2.50% 2.56% 2.00% 0.50%
$500,000 to $999,999 2.00% 2.04% 1.75% 0.25%
$1,000,000 or more* None None See Below* None
</TABLE>
The sales charge for Class A Shares of the Equity Index Fund will be determined
according to the following table:
<TABLE>
<CAPTION>
Sales Charge as
Sales Charge as a Percentage of
a Percentage of: Offering Price:
Net Retained
Amount of Offering Amount Retained by the
Purchase Price Invested by Dealer Distributor
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 3.00% 3.09% 2.75% 0.25%
$100,000 to $249,999 2.50% 2.56% 2.25% 0.25%
$250,000 to $499,999 2.00% 2.04% 1.75% 0.25%
$500,000 to $999,999 1.50% 1.52% 1.25% 0.25%
$1,000,000 or more* None None See Below* None
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*No sales charge applies on investments of $1 million or more, but a contingent
deferred sales charge of 1% is imposed on certain redemptions of such shares
within one year of the date of purchase. See "Reduced Sales Charges on Class A
Shares -- Contingent Deferred Sales Charge, Class A."
- -------------------------------------------------------------------------------
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Although an investor will not pay an initial sales charge on investments of
$1,000,000 or more, the Distributor will pay, from its own resources, a
commission to dealers on such investments. The dealer will receive a commission
of 1.00% on the portion of a sale from $1,000,000 to $2,999,999, 0.50% of any
portion from $3,000,000 to $4,999,999 and 0.40% on any portion of $5,000,000 or
more. Effective, January 1, 1999, commissions will be calculated on a calendar
year basis. Such commission will be paid only on those purchases that were not
previously subject to a front-end sales charge and dealer concession.
The Distributor may allow the full sales charge to be retained by dealers. The
amount retained may be changed from time to time but will remain the same for
all dealers. The Distributor, at its expense, also may from time to time provide
additional promotional incentives to dealers who sell Fund shares. A selected
dealer who receives a reallowance in excess of 90% of such a sales charge may be
deemed to be an "underwriter" under the 1933 Act. Set forth below is an example
of the method of computing the offering price of Class A shares of the Equity
Index Fund. The example assumes a purchase of Class A shares of the Fund
aggregating less than $100,000 subject to the schedule of sales charges set
forth above at a price based upon the net asset value of Class A shares of the
Fund on December 31, 1998.
Net Asset Value per Class A
Share at December 31, 1998
----------
Per Share Sales Charge - 3.00%
of offering price (3.09%
of net asset value per share) ----------
Class A Per Share Offering Price
to the Public
----------
The sales charge applicable to an investment in Class A shares of the California
Tax Free Fund, Global High Yield Fund, Government Fund, High Yield Corporate
Bond Fund, International Bond Fund, New York Tax Free Fund, Strategic Income
Fund and Tax Free Bond Fund will be determined according to the following table:
Net Asset Value per Class A
Share at December 31, 1998
----------
Per Share Sales Charge - 4.50%
of offering price (4.71%
of net asset value per share) ----------
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Class A Per Share Offering Price
to the Public
The sales charge for Class A shares of the Blue Chip Growth Fund, Capital
Appreciation Fund, Convertible Fund, Growth Opportunities Fund, International
Equity Fund, MAP Equity Fund, Research Value Fund, Small Cap Value Fund,
Strategic Value Fund, Total Return Fund and Value Fund will be determined
according to the following table:
Net Asset Value per Class A
Share at December 31, 1998
----------
Per Share Sales Charge - 5.50%
of offering price (5.82%
of net asset value per share) ----------
Class A Per Share Offering Price
to the Public
----------
PURCHASES AT NAV
A Fund's Class A shares may be purchased at NAV, without payment of any sales
charge, by its Trustees, New York Life and its subsidiaries and their employees,
officers, directors or agents (and immediate family members); employees and
clients (and immediate family members) of John A. Levin & Co. ("Levin") and
Dalton, Greiner, Hartman, Maher & Co. ("DGHM"); employees (and immediate family
members) of Gabelli Asset Management Company [and Markston Investment
Management]; and investors who are recommended by Levin or DGHM to invest in the
MainStay funds managed by Levin or DGHM, respectively. Also, any employee or
Registered Representative of an authorized broker-dealer (and immediate family
members) may purchase a Fund's shares at NAV without payment of any sales
charge.
In addition, the Trust will treat Class A share purchases of Funds, other than
the Money Market Fund, in an amount less than $1,000,000 by defined contribution
plans, other than 403(b) plans, that are sponsored by employers with 50 or more
eligible employees as if such purchases were equal to an amount more than
$1,000,000 but less than $2,999,999. Such purchases by defined contribution
plans may be subject to a contingent deferred sales charge of 1% on shares
redeemed within one year of the date of purchase. See "Reduced Sales Charges on
Class A Shares-Contingent Deferred Sales Charge, Class A."
Class A shares of the Funds also may be purchased at net asset value, without
payment of any sales charge, through broker-dealers, investment advisers and
other financial institutions which have
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entered into a supplemental agreement with the Distributor which (I) includes a
requirement that such shares be sold for the benefit of clients participating in
a "wrap account" or similar program under which clients pay a fee to the
broker-dealer, investment adviser or other financial institution or (ii)
provides for certain employee benefit plans to be made available to their
clients.
REDUCED SALES CHARGES ON CLASS A SHARES
The sales charge varies with the size of the purchase and reduced charges apply
to the aggregate of purchases of a Fund made at one time by any "Qualified
Purchaser," which term includes (I) an individual and his/her spouse and their
children under the age of 21; and (ii) any other organized group of persons,
whether incorporated or not, which is itself a shareholder of the Fund,
including group retirement and benefit plans (other than IRAs and non-Erisa
403(b) plans) whether incorporated or not, provided the organization has been in
existence for at least six months and has some purpose other than the purchase
at a discount of redeemable securities of a registered investment company.
LETTER OF INTENT ("LOI")
Qualified Purchasers may obtain reduced sales charges by signing an LOI. The LOI
is a nonbinding obligation on the Qualified Purchaser to purchase the full
amount indicated in the LOI. The sales charge is based on the total amount
invested during a 24-month period. A 90-day back-dated period can be used to
include earlier purchases; the 24- month period would then begin on the date of
the first purchase during the 90-day period. For more information, see the SAI
or call your Registered Representative or MainStay at 1-800-MAINSTAY.
On the initial purchase, if required (or, on subsequent purchases if necessary),
5% of the dollar amount specified in the LOI will be held in escrow by the
Transfer Agent in shares registered in the shareholder's name in order to assure
payment of the proper sales charge. If total purchases pursuant to the LOI (less
any dispositions and exclusive of any distribution on such shares automatically
reinvested) are less than the amount specified, the investor will be requested
to remit to the Distributor an amount equal to the difference between the sales
charge paid and the sales charge applicable to the aggregate purchases actually
made. If not
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<PAGE> 250
remitted within 20 days after written request, an appropriate number of escrowed
shares will be redeemed in order to realize the difference.
CONTINGENT DEFERRED SALES CHARGE, CLASS A
In order to recover commissions paid to dealers on qualified investments of $1
million or more, a contingent deferred sales charge of 1% may be imposed on
redemptions of such investments made within one year of the date of purchase.
Class A shares that are redeemed will not be subject to a contingent deferred
sales charge, however, to the extent that the value of such shares represents:
(1) capital appreciation of Fund assets; (2) reinvestment of dividends or
capital gains distributions; (3) Class A shares redeemed more than one year
after their purchase; (4) withdrawals from qualified retirement plans and
nonqualified deferred compensation plans resulting from separation of service,
loans, hardship withdrawals, death, disability, QDROs and excess contributions
pursuant to applicable IRS rules; and Required Minimum Distributions at age 70
1/2 for IRA and 403(b)(7) TSA participants; (5) transfers within a retirement
plan where the proceeds of the redemption are invested in any guaranteed
investment contract written by New York Life or any of its affiliates; transfers
to products offered within a retirement plan which uses New York Life Benefit
Services, Inc. or TRAC-2000 as the recordkeeper; as well as participant
transfers or rollovers from a retirement plan to a MainStay IRA; or (6)
redemptions, under the Systematic Withdrawal Plan, used to pay scheduled monthly
premiums on insurance policies issued by New York Life or an affiliate. Class A
shares of a Fund that are purchased without a front-end sales charge may be
exchanged for Class A shares of another Fund without the imposition of a
contingent deferred sales charge, although, upon redemption, contingent deferred
sales charges may apply to the Class A shares that were acquired through an
exchange.
The contingent deferred sales charge will be applicable to amounts invested
pursuant to a right of accumulation or an LOI to the extent that (a) a front-end
sales charge was not paid at the time of the purchase and (b) any shares so
purchased are redeemed within one year of the date of purchase.
B-172
<PAGE> 251
For federal income tax purposes, the amount of the contingent deferred sales
charge generally will reduce the gain or increase the loss, as the case may be,
recognized upon redemption.
DEFERRED SALES CHARGE CLASS B SHARES
A contingent deferred sales charge will be imposed on redemptions of Class B
shares of the Funds, in accordance with the table below, at the time of any
redemption by a shareholder which reduces the current value of the shareholder's
Class B account in any Fund to an amount which is lower than the amount of all
payments by the shareholder for the purchase of Class B shares in that Fund
during the preceding six years. However, no such charge will be imposed to the
extent that the net asset value of the Class B shares redeemed does not exceed
(a) the current aggregate net asset value of Class B shares of that Fund
purchased more than six years prior to the redemption, plus (b) the current
aggregate net asset value of Class B shares of that Fund purchased through
reinvestment of dividends or distributions, plus (c) increases in the net asset
value of the investor's Class B shares of that Fund above the total amount of
payments for the purchase of Class B shares of that Fund made during the
preceding six years.
Proceeds from the contingent deferred sales charge are paid to, and are used in
whole or in part by, the Distributor to defray its expenses of providing
distribution related services to the Funds in connection with the sale of the
Class B shares, such as the payment of compensation to selected dealers and
agents. The combination of the contingent deferred sales charge and the
distribution fee facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of purchase.
The amount of the contingent deferred sales charge, if any, paid by a redeeming
shareholder will vary depending on the number of years from the time of payment
for the purchase of Class B shares of any Fund (other than the Money Market
Fund) until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of payment for the purchase of
shares, all payments during a month will be aggregated and deemed to have been
made on the first day of the month.
The following table sets forth the rates of the contingent deferred sales
charge:
B-173
<PAGE> 252
<TABLE>
<CAPTION>
Contingent Deferred Sales
Charge as a Percentage
Year Since Purchase of Amount Redeemed
Payment Made Subject to the Charge
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 2.0%
Fifth 2.0%
Sixth 1.0%
Thereafter None
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
In determining the rate of any applicable contingent deferred sales charge, it
will be assumed that a redemption is made of shares held by the shareholder for
the longest period of time. This will result in any such charge being imposed at
the lowest possible rate. For federal income tax purposes, the amount of the
contingent deferred sales charge generally will reduce the gain or increase the
loss, as the case may be, recognized on the redemption or repurchase of shares.
The contingent deferred sales charge will be waived in connection with the
following redemptions: (I) withdrawals from qualified retirement plans and
nonqualified deferred compensation plans resulting from separation of service,
loans, hardship withdrawals, QDROs and excess contributions pursuant to
applicable IRS rules; and Required Minimum Distributions at age 70 1/2 for IRA
and 403(b) TSA participants; (ii) withdrawals related to the termination of a
retirement plan where no successor plan has been established; (iii) transfers
within a retirement plan where the proceeds of the redemption are invested in
any guaranteed investment contract written by New York Life or any of its
affiliates, transfers to products offered within a retirement plan which uses
New York Life Benefit Services, Inc. as the recordkeeper; as well as participant
transfers or rollovers from a retirement plan to a MainStay IRA; (iv) required
distributions by charitable trusts under Section 664 of the Code; (v)
redemptions following the death of the shareholder or the beneficiary of a
living revocable trust or within one year following the disability of a
shareholder occurring subsequent to the purchase of shares; (vi) redemptions
under the Systematic Withdrawal Plan used to pay scheduled monthly premiums on
insurance policies issued by New York Life or an affiliate; (vii) continuing,
periodic monthly or quarterly withdrawals, under the Systematic Withdrawal Plan,
up to an annual total of 10% of the value of a shareholder's Class B shares in a
Fund; (viii) redemptions by New York Life or any of its affiliates
B-174
<PAGE> 253
or by accounts managed by New York Life or any of its affiliates; (ix)
redemptions effected by registered investment companies by virtue of
transactions with a Fund; (x) involuntary redemptions of an account with a net
asset value of $250 ($500 for the Money Market Fund) or less; and (xi)
redemptions by shareholders of shares purchased with the proceeds of a
settlement payment made in connection with the liquidation and dissolution of a
limited partnership sponsored by New York Life or one of its affiliates.
Additional waivers in effect prior to January 1, 1998 will apply to redemptions
of Class B shares by accounts established before that date. The contingent
deferred sales charge is waived on such sales or redemptions to promote goodwill
and because the sales effort, if any, involved in making such sales is
negligible.
ADDITIONAL CDSC WAIVERS APPLICABLE TO ACCOUNTS ESTABLISHED BEFORE JANUARY 1,
1998
In addition to the categories outlined above, the CDSC will be waived in
connection with the following redemptions of Class B shares by accounts
established before January 1, 1998: (I) withdrawals from IRS qualified and
nonqualified retirement plans, individual retirement accounts, tax sheltered
accounts, and deferred compensation plans, where such withdrawals are permitted
under the terms of the plan or account (e.g., attainment of age 59 1/2,
separation from service, death, disability, loans, hardships, withdrawals of
excess contributions pursuant to applicable IRS rules, withdrawals based on life
expectancy under applicable IRS rules); (ii) preretirement transfers or
rollovers within a retirement plan where the proceeds of the redemption are
invested in proprietary products offered or distributed by New York Life or its
affiliates; (iii) living revocable trusts on the death of the beneficiary; (iv)
redemptions made within one year following the death or disability or a
shareholder; (v) redemptions by directors, Trustees, officers and employees (and
immediate family members) of the Trust and of New York Life and its affiliates
where no commissions have been paid; (vi) redemptions by employees of any dealer
which has a soliciting dealer agreement with the Distributor, and by any trust,
pension, profit-sharing or benefit plan for the benefit of such persons where no
commissions have been paid; (vii) redemptions by tax-exempt employee benefit
plans resulting from the adoption or promulgation of any law or regulation;
(viii) redemptions by any state, country or city, or any instrumentality,
department, authority or agency thereof and by trust companies and bank trust
departments; and (ix) transfers to (a) other funding vehicles sponsored or
distributed by New York Life or
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<PAGE> 254
an affiliated company, or (b) guaranteed investment contracts, regardless of the
sponsor, within a retirement plan.
Shareholders should notify MSS at the time of requesting such redemptions that
they are eligible for a waiver of the contingent deferred sales charge. Class B
shares upon which the contingent deferred sales charge may be waived may not be
resold, except to the Trust. Shareholders who are making withdrawals from
retirement plans and accounts or other tax-sheltered or tax-deferred accounts
should consult their tax advisers regarding the tax consequences of such
withdrawals.
Proceeds from the contingent deferred sales charge are paid to, and are used in
whole or in part by, the Distributor to defray its expenses related to providing
distribution related services to the Funds in connection with the sale of the
Class C shares, such as the payment of compensation to selected dealers and
agents. The combination of the contingent deferred sales charge and the
distribution fee facilitates the ability of the Fund to sell the Class C shares
without a sales charge being deducted at the time of purchase.
CONTINGENT DEFERRED SALES CHARGE, CLASS C
A contingent deferred sales charge of 1% of the net asset value of Class C
shares will be imposed on redemptions of Class C shares of the Funds at the time
of any redemption by a shareholder which reduces the current value of the
shareholder's Class C account in any Fund to an amount which is lower than the
amount of all payments by the shareholder for the purchase of Class C shares in
that Fund during the preceding one year. However, no such charge will be imposed
to the extent that the net asset value of the Class C shares redeemed does not
exceed (a) the current aggregate net asset value of Class C shares of that Fund
purchased more than one year prior to the redemption, plus (b) the current
aggregate net asset value of Class C shares of that Fund purchased through
reinvestment of dividends, or distributions, plus (c) increases in the net asset
value of the investor's Class C shares of that Fund above the total amount of
payments for the purchase of Class C shares of that Fund made during the
preceding one year.
REDEMPTIONS AND EXCHANGES
B-176
<PAGE> 255
Shares may be redeemed directly from a Fund or through your Registered
Representative. Shares redeemed will be valued at the NAV per share next
determined after MSS receives the redemption request in "good order." "Good
order" with respect to a redemption request generally means that for
certificated shares, a stock power or certificate must be endorsed, and for
uncertificated shares a letter must be signed, by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed by an eligible
guarantor institution. In cases where redemption is requested by a corporation,
partnership, trust, fiduciary or any other person other than the record owner,
written evidence of authority acceptable to MSS must be submitted before the
redemption request will be accepted. The signature guarantee may be waived on a
redemption of $100,000 or less which is payable to the shareholder(s) of record
and mailed to the address of record, or under such other circumstances as the
Trust may allow. Send your written request to The MainStay Funds, P.O. Box 8401,
Boston, MA 02266-8401.
Upon the redemption of shares the redeeming Fund will make payment in cash,
except as described below, of the net asset value of the shares next determined
after such redemption request was received, less any applicable contingent
deferred sales charge. There will be no redemption, however, during any period
in which the right of redemption is suspended or date of payment is postponed
because the New York Stock Exchange is closed or trading on such Exchange is
restricted or the SEC deems an emergency to exist.
The value of the shares redeemed from a Fund may be more or less than the
shareholder's cost, depending on portfolio performance during the period the
shareholder owned the shares.
REDEMPTION BY CHECK
The Money Market Fund and State Street Bank and Trust Company (the "Bank") each
reserve the right at any time to suspend the procedure permitting redemption by
check and intend to do so in the event that federal legislation or regulations
impose reserve requirements or other restrictions deemed by the Trustees to be
adverse to the interest of other shareholders of the Money Market Fund.
Shareholders who arrange to have checkwriting privileges will be subject to the
rules and regulations of the Bank pertaining to this checkwriting privilege as
amended from time to time. The applicable rules and regulations will be made
available by the Bank upon request when a shareholder establishes checkwriting
privileges.
SYSTEMATIC WITHDRAWAL PLAN
Dividends and capital gains distributions on shares held under the Systematic
Withdrawal Plan are reinvested in additional full and fractional shares of the
same Fund at NAV. MSS acts as agent for
B-177
<PAGE> 256
the shareholder in redeeming sufficient full and fractional shares to provide
the amount of the systematic withdrawal payment and any contingent deferred
sales charge, if applicable.
DISTRIBUTIONS IN KIND
The Trust has agreed to redeem shares of each Fund solely in cash up to
the lesser of $250,000 or 1% of the net asset value of the Fund during any
90-day period for any one shareholder. The Trust reserves the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from the applicable Fund's portfolio. The securities
distributed in such a distribution would be valued at the same value as that
assigned to them in calculating the NAV of the shares being redeemed. If a
shareholder receives a distribution in kind, he or she should expect to incur
transaction costs when he or she converts the securities to cash.
SUSPENSION OF REDEMPTIONS
The Trust may suspend the right of redemption of shares of any Fund and
may postpone payment for any period: (I) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted; (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) as the SEC may by order permit for the
protection of the security holders of the Trust; or (iv) at any other time when
the Trust may, under applicable laws and regulations, suspend payment on the
redemption or repurchase of its shares.
EXCHANGE PRIVILEGES
Exchanges will be based upon each Fund's NAV per share next computed following
receipt of a properly executed exchange request.
Subject to the conditions and limitations described herein, Class A, Class B and
Class C shares of a Fund may be exchanged for shares of an identical class of a
MainStay Fund registered in the state of residence of the investor or where an
exemption from registration is available and only with respect to Funds that are
available for
B-178
<PAGE> 257
sale to new investors. The Convertible Fund currently is closed to new investors
and will not accept exchanges.
In addition, an exchange privilege between Class A shares of the Funds and
MainStay Equity Index Fund is offered. Any exchanges between a Fund and MainStay
Equity Index Fund will be subject to the conditions applicable to Class A share
exchanges described herein, as well as any applicable minimum investment
requirements. No exchange privilege between Class B or Class C shares of the
Funds and MainStay Equity Index Fund is offered.
INVESTORS SHOULD READ THE PROSPECTUS CAREFULLY BEFORE THEY PLACE AN EXCHANGE
REQUEST.
Generally, shareholders may exchange their Class A shares of a Fund for Class A
shares of another MainStay Fund, without the imposition of a sales charge. Any
such exchanges will be based upon each Fund's NAV per share next computed
following receipt of a properly executed exchange request. However, where a
shareholder seeks to exchange Class A shares of the Money Market Fund for Class
A shares of another MainStay Fund which are subject to a front-end sales charge,
the applicable sales charge will be imposed on the exchange, unless the
shareholder has previously paid a sales charge with respect to such shares.
Class B and Class C shares of a Fund may be exchanged for the same class of
shares of another MainStay Fund at the NAV next computed following receipt of a
properly executed exchange request, without the payment of a contingent deferred
sales charge; the sales charge will be assessed, if applicable, when the
shareholder redeems his or her shares without a corresponding purchase of shares
of another MainStay Fund. However, where a shareholder previously exchanged his
or her Class B or Class C shares into the Money Market Fund from another
MainStay Fund, the applicable contingent deferred sales charge will be assessed
when the shares are redeemed from the Money Market Fund even though the Money
Market Fund does not otherwise assess a contingent deferred sales charge on
redemptions. Class B and Class C shares of a Fund acquired as a result of
subsequent investments, except reinvested dividends and distributions, will be
subject to the contingent deferred sales charge when ultimately redeemed or
repurchased without purchasing shares of another MainStay Fund.
Exchanges may only be made with respect to Funds registered in the state of
residence of the investor or where an exemption from registration is available
and only with respect to Funds that are available for sale to new investors. An
exchange may be made by either writing to MSS at the following address: The
MainStay Funds,
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<PAGE> 258
P.O. Box 8401, Boston, Massachusetts 02266-8401, or by calling MSS at
1-800-MAINSTAY (8:00 AM to 4:00 PM Eastern time).
In times when the volume of telephone exchanges is heavy, additional phone lines
will automatically be added by MSS. However, in times of drastic economic or
market changes, the telephone exchange privilege may be difficult to implement.
When calling MSS to make a telephone exchange, shareholders should have
available their account number and Social Security or Taxpayer I.D. numbers.
Under the telephone exchange privilege, shares may only be exchanged among
accounts with identical names, addresses and Social Security or Taxpayer I.D.
numbers. Shares may be transferred among accounts with different names,
addresses and Social Security or Taxpayer I.D. numbers only if the exchange
request is in writing and is received in "good order." If the dealer permits,
the dealer representative of record may initiate telephone exchanges on behalf
of a shareholder, unless the shareholder notifies the Fund in writing not to
permit such exchanges.
It is the policy of The MainStay Funds to discourage frequent trading by
shareholders among the Funds in response to market fluctuations. Accordingly, in
order to maintain a stable asset base in each Fund and to reduce administrative
expenses borne by each Fund, five exchanges per account are permitted in each
calendar year without the imposition of any transaction fee; subsequently, a $10
fee will be assessed per exchange and additional exchange requests may be
denied.
For purposes of determining the length of time a shareholder owned Class B or
Class C shares prior to redemption or repurchase in order to determine the
applicable contingent deferred sales charge, if any, shares will be deemed to
have been held from the date of purchase of the shares, regardless of exchanges
into other Funds. For federal income tax purposes, an exchange is treated as a
sale on which an investor may realize a gain or loss. See "Understand the Tax
Consequences" for information concerning the federal income tax treatment of a
disposition of shares. All exchanges are subject to the minimum investment
requirements of the Funds involved. The exchange privilege may be modified or
withdrawn at any time upon prior notice.
DISTRIBUTIONS AND REDEMPTIONS FOR EQUITY INDEX FUND
For the Equity Index Fund, Distributions will be paid in additional shares based
on the NAV at the close of business on the payment date of the distribution,
unless the shareholder elects to receive such distributions in cash. Receipt of
dividends in cash by a shareholder will have the effect of reducing the number
of Guaranteed Shares held by that shareholder, and, therefore, the value of the
Guarantee to that shareholder. If, however, the Fund
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pays a dividend in cash to all shareholders for the purpose of assuring the
Fund's compliance with applicable provisions of the Code, any such amounts paid
in cash will reduce the Guaranteed Amount applicable to each Guaranteed Share in
the amount of the dividend paid.
For shareholder convenience in monitor the number and value of a
shareholder's Guaranteed Shares, the Fund currently intends, through reverse
share splits, to combine any additional shares received by a shareholder as
dividends and distributions from the Fund with each originally purchased share
of the Fund to which such dividends and distributions relate, so that a
Guaranteed Share of the Fund will mean a single share of the Fund as purchased
and include in its NAV the value of all dividends and distributions attributable
to such originally purchased share and paid up to that point in time. Following
a reverse share split, a shareholder who has elected to reinvest dividends and
distributions from the Fund will hold the same number of Guaranteed Shares in
the Fund as the shareholder held prior to the reverse share split, but each
share will have a higher NAV (reflecting the added value of the dividends paid).
Shareholders who elect to receive their dividends and distributions from the
Fund in cash will, following a reverse share split, own fewer Guaranteed Shares
of the Fund, but those shares will have the same higher per share NAV as all
other Fund shares. IN EITHER CASE, THE OVERALL VALUE OF A SHAREHOLDER'S
INVESTMENT IN THE FUND WILL BE UNAFFECTED BY A REVERSE SHARE SPLIT. If reverse
share splits are not authorized, a Guaranteed Share shall mean, on a given date,
that number of shares of the Fund that a shareholder would hold on that date if
he had bought a single share and then held it, plus all shares issued as
dividends and distributions attributable to such share through the Guarantee
Date. This single share and all other shares issued through the reinvestment of
any dividends and distributions attributable to such share will be treated as a
single unit to which the Guaranteed Amount will apply as described above for a
Guaranteed Share. Shareholders who elect to receive dividends and distributions
in cash would hold fewer shares of the Fund and, consequently, fewer units as to
which the Guaranteed Amount would apply. Equity Index Fund shares may be
redeemed by shareholders prior to their Guaranteed Date. However, any such
redeemed shares will lose the benefit of the Guarantee.
Within seven days after acceptance of a redemption request, the Equity
Index Fund is required to make payment of the NAV of the shares on the date the
order was received in proper form, except that where a request is made at least
30 days prior to a dividend or distribution record date to redeem the dividend
shares immediately upon issuance (to effectively receive the dividend in cash),
redemption and payment will occur at that time.
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<PAGE> 260
TAX-DEFERRED RETIREMENT PLANS
CASH OR DEFERRED PROFIT SHARING PLANS UNDER SECTION 401(k) FOR CORPORATIONS AND
SELF-EMPLOYED INDIVIDUALS
Shares of a Fund, except the California Tax Free Fund, New York Tax Free
Fund and Tax Free Bond Fund, may also be purchased as an investment under a
specimen cash or deferred profit sharing plan intended to qualify under Section
401(k) of the Code (a "401(k) Plan") adopted by a corporation, a self-employed
individual (including sole proprietors and partnerships), or other organization.
All Funds, except the California Tax Free Fund, New York Tax Free Fund and Tax
Free Bond Fund, may be used as funding vehicles for qualified retirement plans
including 401(k) plans, which may be administered by third-party administrator
organizations. NYLIFE Distributors does not sponsor or administer such qualified
plans at this time.
INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
Shares of a Fund, except the California Tax Free Fund, New York Tax Free
Fund and Tax Free Bond Fund, may also be purchased as an underlying investment
for an IRA made available by NYLIFE Distributors. Three types of IRAs are
available -- a traditional IRA, the "Roth" IRA and the "Education" IRA.
An individual may contribute as much as $2,000 of his or her earned
income to a traditional IRA. A married individual filing a joint return may also
contribute to a traditional IRA for a nonworking spouse. The maximum deduction
allowed for a contribution to a spousal IRA is the lesser of (I) $2,000 or (ii)
the sum of (a) the compensation includible in the working spouse's gross income
plus (b) any compensation includible in the gross income of the nonworking
spouse, reduced by the amount of the deduction taken by the working spouse. The
maximum deduction for an IRA contribution by a married couple is $4,000.
An individual who has not attained age 70-1/2 may make a contribution to
a traditional IRA which is deductible for federal income tax purposes. For the
1998 tax year, a contribution is
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deductible only if the individual (and his or her spouse, if applicable) has an
adjusted gross income below a certain level ($50,000 for married individuals
filing a joint return, with a phase-out of the deduction for adjusted gross
income between $50,000 and $60,000; $30,000 for a single individual, with a
phase-out for adjusted gross income between $30,000 and $40,000). These
phase-out limits will gradually increase, eventually reaching $50,000 - $60,000
for single filers in 2005 and thereafter (and reaching $80,000 - $100,000 if
married filing jointly in 2007 and thereafter). In addition, a married
individual may make a deductible IRA contribution even though the individual's
spouse is an active participant in a qualified employer's retirement plan,
subject to a phase-out for adjusted gross income between $150,000 - $160,000
($0-$10,000 for non-participant spouses filing a separate return). However, an
individual not permitted to make a deductible contribution to an IRA may
nonetheless make nondeductible contributions up to the maximum contribution
limit for that year. The deductibility of IRA contributions under state law
varies from state to state.
Distributions from IRAs (to the extent they are not treated as a tax-free
return of nondeductible contributions) are taxable under federal income tax laws
as ordinary income. There are special rules for determining how withdrawals are
to be taxed if an IRA contains both deductible and nondeductible amounts. In
general, all traditional IRAs are aggregated and treated as one IRA, all
withdrawals are treated as one withdrawal, and then a proportionate amount of
the withdrawal will be deemed to be made from nondeductible contributions;
amounts treated as a return of nondeductible contributions will not be taxable.
Certain early withdrawals are subject to an additional penalty tax. However,
there are exceptions for certain withdrawals, including: withdrawals up to a
total of $10,000 for qualified first-time homebuyer expenses or withdrawals used
to pay "qualified higher education expenses" of the taxpayer or his or her
spouse, child or grandchild. There are also special rules governing when IRA
distributions must begin and the minimum amount of such distributions; failure
to comply with these rules can result in the imposition of an excise tax.
Roth IRAs. Roth IRAs are a form of individual retirement account which
feature nondeductible contributions that may be made even after the individual
attains the age of 70-1/2. In certain cases, distributions from a Roth IRA may
be tax free. The Roth IRA, like the traditional IRA, is subject to a $2,000
($4,000 for a married couple) contribution limit (taking into account both Roth
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IRA and traditional IRA contributions). The maximum contribution that can be
made is phased-out for taxpayers with adjusted gross income between $95,000 and
$110,000 ($150,000 - $160,000 if married filing jointly). If the Roth IRA has
been in effect for five years, and distributions are (1) made on or after the
individual attains the age of 59-1/2; (2) made after the individual's death; (3)
attributable to disability; or (4) used for "qualified first-time home buyer
expenses," they are not taxable. If these requirements are not met,
distributions are treated first as a return of contributions and then as taxable
earnings. Taxable distributions may be subject to the same excise tax described
above with respect to traditional IRAs. All Roth IRAs, like traditional IRAs,
are treated as one IRA for this purpose. Unlike the traditional IRA, Roth IRAs
are not subject to minimum distribution requirements during the account owner's
lifetime. However, the amount in a Roth IRA is subject to required distribution
rules after the death of the account owner.
Education IRAs. A taxpayer may make non-deductible contributions of up to
$500 per year per beneficiary to an Education IRA. Contributions cannot be made
after the beneficiary becomes 18 years old. The maximum contribution is phased
out for taxpayers with adjusted gross income between $95,000 and $110,000
($150,000 - $160,000 if married filing jointly). Earnings are tax-deferred until
a distribution is made. If a distribution does not exceed the beneficiary's
"qualified higher education expenses" for the year, no part of the distribution
is taxable. If part of a distribution is taxable, a penalty tax will generally
apply as well. Any balance remaining in an Education IRA when the beneficiary
becomes 30 years old must be distributed and any earnings will be taxable and
subject to a penalty tax upon distribution.
All income and capital gains deriving from IRA investments in the Fund
are reinvested and compounded tax-deferred until distributed from the IRA. The
combination of annual contributions to a traditional IRA, which may be
deductible, and tax-deferred compounding can lead to substantial retirement
savings. Similarly, the combination of tax free distributions from a Roth IRA or
Education IRA combined with tax-deferred compounded earnings on IRA investments
can lead to substantial retirement and/or education savings.
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403(b)(7) TAX SHELTERED ACCOUNT
Shares of a Fund, except the California Tax Free Fund, New York Tax Free
Fund and Tax Free Bond Fund, may also be purchased as the underlying investment
for tax sheltered custodial accounts (403(b) plans) made available by NYLIFE
Distributors. In general, employees of tax-exempt organizations described in
Section 501(c)(3) of the Code (such as hospitals, churches, religious,
scientific, or literary organizations and educational institutions) or a public
school system are eligible to participate in a 403(b) plan.
GENERAL INFORMATION
Shares of a Fund, except the California Tax Free Fund, New York Tax Free
Fund and Tax Free Bond Fund, may also be a permitted investment under profit
sharing, pension, and other retirement plans, IRAs, and tax-deferred annuities
other than those offered by the Fund depending on the provisions of the relevant
plan. Third-party administrative services, available for some corporate plans,
may limit or delay the processing of transactions.
The custodial agreements and forms provided by the Funds' Custodian and
Transfer Agent designate New York Life Trust Company as custodian for IRAs and
403(b) plans (unless another trustee or custodian is designated by the
individual or group establishing the plan) and contain specific information
about the plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by New York Life Trust Company, tax consequences and
redemption information, see the specific documents for that plan.
The federal tax laws applicable to retirement plans, IRAs and 403(b)
plans are extremely complex and change from time to time. Therefore, an investor
should consult with his or her own professional tax adviser before establishing
any of the tax-deferred retirement plans described above.
CALCULATION OF PERFORMANCE QUOTATIONS
From time to time, quotations of the Money Market Fund's "yield" and
"effective yield" may be included in advertisements or communications to
shareholders. These performance figures are calculated in the following manner:
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A. Yield -- the net annualized yield based on a specified
seven-calendar day period calculated at simple interest rates. Yield is
calculated by determining the net change, exclusive of capital changes,
in the value of a hypothetical preexisting account having a balance of
one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base
period to obtain the base period return. The yield is annualized by
multiplying the base period return by 365/7. The yield figure is stated
to the nearest hundredth of one percent. The yield of the Class A, Class
B and Class C shares of the Money Market Fund for the seven-day period
ended December 31, 1998 was ____%, _____% and ____%, respectively.
B. Effective Yield -- the net annualized yield for a specified
seven-calendar day period assuming a reinvestment of dividends
(compounding). Effective yield is calculated by the same method as yield
except the yield figure is compounded by adding one, raising the sum to a
power equal to 365 divided by 7, and subtracting one from the result,
according to the following formula: Effective Yield = [(Base Period
Return + 1) 365/7] - 1. The effective yield of the Class A, Class B and
Class C shares of the Money Market Fund for the seven-day period ended
December 31, 1998 was and, respectively.
The yield and effective yield of the Money Market Fund reflect the
reduction of certain fees otherwise payable and voluntary expense
limitations. Had there been no reduction of fees or expense limitations,
the yield and effective yield of the Money Market Fund would have been
_____% and _____%, respectively, for Class A shares, _____% and _____%,
respectively, for Class B shares and ____% and ______%, respectively, for
Class C shares for the seven-day period ended December 31, 1998.
As described above, yield and effective yield are based on historical
earnings and are not intended to indicate future performance. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of the assumed reinvestment of dividends. Yield and effective yield will
vary based on changes in market conditions and the level of expenses.
B-186
<PAGE> 265
From time to time a Fund, other than the Money Market Fund, may publish
its yield and/or average annual total return in advertisements and
communications to shareholders. Total return and yield are computed separately
for Class A and Class B shares. The average annual total return of each Fund is
determined for a particular period by calculating the actual dollar amount of
the investment return on a $1,000 investment in the Fund made at the maximum
public offering price at the beginning of the period, and then calculating the
annual compounded rate of return which would produce that amount. Total return
for a period of one year is equal to the actual return of the Fund during that
period and reflects fee waivers and reimbursements in effect for each period.
This calculation assumes a complete redemption of the investment and the
deduction of the maximum contingent deferred sales charge at the end of the
period in the case of Class B shares. In the case of Class A shares, the
calculation assumes the maximum sales charge is deducted from the initial $1,000
purchase order. It also assumes that all dividends and distributions are
reinvested at net asset value on the reinvestment dates during the period. The
performance information shown below for the period ended December 31, 1998
provides performance figures for both Class A and Class B shares of the Funds,
except in the case of the Equity Index Fund which offers only one class of
shares, Class A shares.
In considering any average annual total return quotation, investors
should remember that the maximum initial sales charge reflected in each
quotation for Class A shares is a one-time fee which will have its greatest
impact during the early stages of an investor's investment in the Fund. The
actual performance of your investment will be affected less by this charge the
longer you retain your investment in the Fund.
Quotations of each Fund's average annual total return will be calculated
according to the following SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10-year periods at
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<PAGE> 266
the end of the 1, 5, or 10-year periods (or fractional
portion thereof)
Each Fund may quote total rates of return in addition to its average
annual total return. Such quotations are computed in the same manner as the
average annual compounded rate, except that such quotations will be based on a
Fund's actual return for a specified period as opposed to its average return
over 1, 5, and 10-year periods. In considering any total rate of return
quotation, investors should remember that the maximum initial sales charge
reflected in each quotation for Class A shares is a one-time fee which will have
its greatest impact during the early stages of an investor's investment in the
Fund. The actual performance of your investment will be affected less by this
charge the longer you retain your investment in the Fund.
The average annual total returns of the Class A shares of the following
Funds for the one-year and, as applicable, five-year and ten-year periods ended
December 31, 1998 and the period from inception to December 31, 1998 were as
follows:*
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/98 12/31/98 12/31/98 Return(a) Date
- ---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
Blue Chip Growth Fund ............. 6/1/98
California Tax Free Fund .......... 10/1/91
Capital Appreciation Fund (b)...... 5/1/86
Convertible Fund (b)............... 5/1/86
Equity Income Fund ................ 6/1/98
Equity Index Fund ................. 12/20/90
Global High Yield Fund ............ 6/1/98
Government Fund (b)................ 5/1/86
Growth Opportunities Fund ......... 6/1/98
High Yield Corporate
Bond Fund (b) 5/1/86
International Bond Fund (b)........ 9/13/94
International Equity Fund (b)...... 9/13/94
New York Tax Free Fund............. 10/1/91
Research Value Fund ............... 6/1/98
Small Cap Growth Fund ............. 6/1/98
Small Cap Value Fund .............. 6/1/98
Strategic Income Fund.............. 2/28/97
Strategic Value Fund............... 10/22/97
Tax Free Bond Fund (b)............. 5/1/86
Total Return Fund (b).............. 12/29/87
Value Fund (b)..................... 5/1/86
</TABLE>
- --------------
* Assumes the deduction of the maximum applicable initial sales charge.
(a) From inception to 12/31/97.
(b) Performance figures for the Funds' Class A shares, first offered to the
public on January 3, 1995, include the historical performance of the
Fund's Class B shares for the period from inception through
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<PAGE> 267
December 31, 1994. Performance data for the two classes after this date
vary based on differences in their expense structures.
The average annual total returns of the Class C shares of the following
Funds for the one-year and, as applicable, five-year and ten-year periods ended
December 31, 1998, and the period from inception to December 31, 1998 were as
follows*:
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/98* 12/31/98* 12/31/98* Return(a) Date
- ---- --------- --------- --------- --------- ----
<S> <C> <C> <C> <C> <C>
Blue Chip Growth Fund 6/1/98
California Tax Free Fund .......... 10/1/91
Capital Appreciation Fund ......... 5/1/86
Convertible Fund .................. 5/1/86
Equity Income Fund ................ 6/1/98
Global High Yield Fund ............ 6/1/98
Government Fund 5/1/86
Growth Opportunities Fund ......... 6/1/98
High Yield Corporate
Bond Fund........................ 5/1/86
International Bond Fund............ 9/13/94
International Equity Fund.......... 9/13/94
New York Tax Free Fund ............ 10/1/91
Research Value Fund ............... 6/1/98
Small Cap Growth Fund ............. 6/1/98
Small Cap Value Fund .............. 6/1/98
Strategic Income Fund.............. 2/28/97
Strategic Value Fund............... 10/22/97
Tax Free Bond Fund................. 5/1/86
Total Return Fund.................. 12/29/87
Value Fund......................... 5/1/86
</TABLE>
- --------------
* Assumes a complete redemption at the end of each year and the deduction
of the maximum applicable contingent deferred sales charge.
(a) From inception to 12/31/97.
(b) Performance figures for the Funds' Class B shares, first offered to the
public on January 3, 1995, include the historical performance of the
Fund's Class A shares for the period from inception through December 31,
1994. Performance data for the two classes after this date vary based on
differences in their expense structures.
The average annual total returns of the Class C shares of the following
Funds for the one-year and, as applicable, five-year and ten-year periods ended
December 31, 1998, and the period from inception to December 31, 1998 were as
follows*:
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<PAGE> 268
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/98* 12/31/98* 12/31/98* Return(a) Date
- ---- --------- --------- --------- --------- ----
<S> <C> <C> <C> <C> <C>
Blue Chip Growth Fund 6/1/98
California Tax Free Fund 10/1/91
Capital Appreciation Fund 5/1/86
Convertible Fund 5/1/86
Equity Income Fund 6/1/98
Global High Yield Fund 6/1/98
Government Fund 5/1/86
Growth Opportunities Fund 6/1/98
High Yield Corporate
Bond Fund 5/1/86
International Bond Fund 9/13/94
International Equity Fund 9/13/94
New York Tax Free Fund 10/1/91
Research Value Fund 6/1/98
Small Cap Growth Fund 6/1/98
Small Cap Value Fund 6/1/98
Strategic Income Fund 2/28/97
Strategic Value Fund 10/22/97
Tax Free Bond Fund 5/1/86
Total Return Fund 12/29/87
Value Fund 5/1/86
</TABLE>
- --------------
* Assumes a complete redemption at the end of each year and the deduction
of the maximum applicable contingent deferred sales charge. Performance
figures for the Funds' Class C shares, first offered to the public on
September 1, 1998, include the historical performance of the Funds'
[Class A/B] shares for the period from inception through August 31, 1998
Performance data for the two classes after this date vary based on
differences in their expense structures.
(a) From inception to 12/31/98.
The average annual total returns of the Class A shares of the
following Funds without deducting the applicable initial sales charge is as
follows:
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<PAGE> 269
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/98 12/31/98 12/31/98 Return(a) Date
- ---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
Blue Chip Growth Fund ............. 6/1/98
California Tax Free Fund .......... 10/1/91
Capital Appreciation Fund (b)...... 5/1/86
Convertible Fund(b)................ 5/1/86
Equity Income Fund ................ 6/1/98
Equity Index Fund ................. 12/20/90
Global High Yield Fund ............ 6/1/98
Government Fund(b)................. 5/1/86
Growth Opportunities Fund ......... 6/1/98
High Yield Corporate
Bond Fund (b) 5/1/86
International Bond Fund (b)........ 9/13/94
International Equity Fund (b)...... 9/13/94
New York Tax Free Fund............. 10/1/91
Research Value Fund ............... 6/1/98
Small Cap Growth Fund ............. 6/1/98
Small Cap Value Fund .............. 6/1/98
Strategic Income Fund.............. 2/28/97
Strategic Value Fund............... 10/22/97
Tax Free Bond Fund (b)............. 5/1/86
Total Return Fund (b).............. 12/29/87
Value Fund (b)..................... 5/1/86
</TABLE>
- --------------
(a) From inception to 12/31/97.
(b) Performance figures for the Funds' Class A shares, first offered to the
public on January 3, 1995, include the historical performance of the
Fund's Class B shares for the period from inception through December 31,
1994. Performance data for the two classes after this date vary based on
differences in their expense structures.
The average annual total returns of the Class C shares of the following
Funds without deducting the applicable contingent deferred sales charge is as
follows*:
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<PAGE> 270
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/98 12/31/98 12/31/98 Return(a) Date
- ---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
Blue Chip Growth Fund ............. 6/1/98
California Tax Free Fund (b) ...... 10/1/91
Capital Appreciation Fund ......... 5/1/86
Convertible Fund .................. 5/1/86
Equity Income Fund ................ 6/1/98
Global High Yield Fund ............ 6/1/98
Government Fund 5/1/86
Growth Opportunities Fund ......... 6/1/98
High Yield Corporate
Bond Fund ........... 5/1/86
International Bond Fund ........... 9/13/94
International Equity Fund ......... 9/13/94
New York Tax Free Fund (b)......... 10/1/91
Research Value Fund ............... 6/1/98
Small Cap Growth Fund ............. 6/1/98
Small Cap Value Fund .............. 6/1/98
Strategic Income Fund.............. 2/28/97
Strategic Value Fund............... 10/22/97
Tax Free Bond Fund ................ 5/1/86
Total Return Fund ................. 12/29/87
Value Fund......................... 5/1/86
</TABLE>
- --------------
(a) From inception to 12/31/97.
(b) Performance figures for the Funds' Class B shares, first offered to the
public on January 3, 1995, include the historical performance of the
Fund's Class A shares for the period from inception through December 31,
1994. Performance data for the two classes after this date vary based on
differences in their expense structures.
The average annual total returns of the Class C shares of the following
Funds without deducting the applicable contingent deferred sales charge is as
follows*:
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/98* 12/31/98* 12/31/98* Return(a) Date
- ---- --------- --------- --------- --------- ----
<S> <C> <C> <C> <C> <C>
Blue Chip Growth Fund
California Tax Free Fund
Capital Appreciation Fund
Convertible Fund
Equity Income Fund
Global High Yield Fund
Government Fund
Growth Opportunities Fund
High Yield Corporate
Bond Fund
International Bond Fund
International Equity Fund
New York Tax Free Fund
Research Value Fund
Small Cap Growth Fund
</TABLE>
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<PAGE> 271
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/98* 12/31/98* 12/31/98* Return(a) Date
- ---- --------- --------- --------- --------- ----
<S> <C> <C> <C> <C> <C>
Small Cap Value Fund
Strategic Income Fund
Strategic Value Fund
Tax Free Bond Fund
Total Return Fund
Value Fund
</TABLE>
- --------------
(a) From inception to 12/31/97.
(*) Performance figures for the Funds' Class C shares, first offered to the
public on September 1, 1998, include the historical performance of the
Funds' [Class A/B] shares for the period from inception through August
31, 1998. Performance data for the two classes after this date vary based
on differences in their expense structures.
The average annual total returns of the MAP Equity Fund's Class I Shares
for the one-year, five-year and ten-year periods ended December 31, 1998 and the
period since inception [on ________, 1970] through December 31, 1998 are ___%,
___%, ___% and ___%, respectively. These figures are based on the performance of
the Mutual Benefit Fund, which was renamed the MAP-Equity Fund in 1995 and was
reorganized as the MainStay MAP Equity Fund on June ____, 1999.
The performance data quoted represents historical performance and the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
The yield of each Fund, except the Money Market Fund, is computed by
dividing its net investment income (determined in accordance with the following
SEC formula) earned during a recent 30-day period by the product of the average
daily number of shares outstanding and entitled to receive dividends during the
period and the maximum offering price per share on the last day of the period.
The results are compounded on a bond equivalent (semiannual) basis and then they
are annualized. Yield will be calculated using the following SEC formula:
6
Yield = 2[(a-b +1) -1]
---
cd
where:
a = interest earned during the period
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<PAGE> 272
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
This yield figure does not reflect the deduction of any contingent
deferred sales charges which are imposed upon certain redemptions at the rates
set forth under "Redemptions and Repurchases" in the Prospectus.
For the 30-day period ended December 31, 1998, the yield of each of the
following Funds was:
<TABLE>
<CAPTION>
30-Day
Period Ended
December 31,
1998
------------
Fund Class A Class B Class C
---- ------- ------- -------
<S> <C> <C> <C>
California Tax Free Fund..............
Government Fund.......................
High Yield Corporate Bond Fund........
International Bond Fund...............
New York Tax Free Fund................
Tax Free Bond Fund....................
Strategic Income Fund.................
</TABLE>
The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond
Fund may publish its tax equivalent yield in advertisements and communications
to shareholders. The tax equivalent yield is calculated by determining the rate
of return that would have to be achieved on a fully taxable investment to
produce the after-tax equivalent of the Fund's yield, assuming certain tax
brackets for a Fund shareholder.
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<PAGE> 273
The table below illustrates the taxable yield equivalent to a tax-free
yield of 5.50%.*+
<TABLE>
<CAPTION>
To Equal a 5.50% Tax
If Free Return, a Taxable
Your Federal Investment Would Have to
Marginal Tax Earn Without Fee Reduction
Rate is: or Expense Limit
------------ --------------------------
<S> <C>
15.00% 6.47%
28.00% 7.64%
31.00% 7.97%
36.00% 8.59%
39.60% 9.11%
</TABLE>
- --------------------
* This table reflects application of the regular Federal income tax only;
other taxes may be applicable with respect to a particular shareholder.
Such taxes could change the information shown. Tax rates are subject to
change. Investors in the California and New York Tax Free Funds should in
particular note that the chart does not reflect any state and local taxes
that may be deductible in computing Federal income tax liability.
+ This table is for illustrative purposes only; investors should consult
their tax advisers with respect to the tax implications of an investment
in a Fund that invests primarily in securities, the interest on which is
exempt from regular Federal income tax.
A Fund may also include its current dividend rate in its prospectus, in
supplemental sales literature, or in communications to shareholders. The current
dividend rate of each Fund for a particular period is calculated by annualizing
total distributions per share from net investment income (including equalization
credits, excluding realized short-term capital gains and premiums from writing
options) during this period and dividing this amount by the maximum offering
price per share on the last day of the period. The current dividend rate does
not reflect all components of a Fund's performance including (i) realized and
unrealized capital gains and losses, which are reflected in calculations of a
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<PAGE> 274
Fund's total return, or (ii) the amortized discount and premium on debt
obligations in income using the current market value of the obligations, as is
currently required for yield calculations. In addition, the current dividend
rate does not take into account the imposition of any contingent deferred sales
charge on the redemption of Fund shares. Any performance figure which does not
take into account the contingent deferred sales charge would be reduced to the
extent such charge is imposed upon a redemption.
Investors should note that the investment results of a Fund will
fluctuate over time, and any presentation of a Fund's yield, current dividend
rate, total return or tax-equivalent yield of any prior period should not be
considered as a representation of what an investment may earn or what an
investor's yield, current dividend rate, total return or tax-equivalent yield
may be in any future period.
In addition, advertising for a Fund may indicate that investors may
consider diversifying their investment portfolios in order to seek protection of
the value of their assets against inflation. From time to time, advertising
materials for a Fund may refer to or discuss current or past business,
political, economic or financial conditions, including events as they relate to
those conditions, such as any U.S. monetary or fiscal policies and the current
rate of inflation. In addition, from time to time, advertising materials for a
Fund may include information concerning retirement and investing for retirement
and may refer to the approximate number of then-current Fund shareholders,
shareholder accounts and Fund assets.
From time to time, advertising and sales literature for a Fund may
discuss the investment philosophy, personnel and assets under management of the
Fund's Manager and Sub-Adviser, and other pertinent facts relating to the
management of the Fund by the adviser.
From time to time any of the Funds may publish an indication of its past
performance as measured by independent sources such as Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Spot Market Prices, Barron's, BusinessWeek, Kiplinger's
Personal Finance, Financial World, Forbes, Money, Morningstar, Personal
Investor, Sylvia Porter's Personal Finance, and The Wall Street Journal.
In addition, performance information for a Fund may be compared, in
advertisements, sales literature, and reports to
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shareholders, to: (i) unmanaged indexes, such as the Standard & Poor's 500
Composite Stock Price Index, the Salomon Brothers Broad Investment Grade Bond
Index, the Morgan Stanley Capital International indexes; the Dow Jones
Industrial Average, Donoghue Money Market Institutional Averages, the Merrill
Lynch 1 to 3 Year Treasury Index, the Salomon Brothers World Government
Benchmark Bond Index, the Salomon Brothers non-U.S. Dollar World Government Bond
Index, the Lehman Brothers Municipal Bond Index and the Lehman Brothers
Government Corporate Index; (ii) other groups of mutual funds tracked by
Morningstar Inc. or Lipper Analytical Services, widely used independent research
firms which rank mutual funds by overall performance, investment objectives and
assets, or tracked by other services, companies, publications or persons who
rank mutual funds on overall performance or other criteria; and (iii) the
Consumer Price Index (measure for inflation) and other measures of the
performance of the economy to assess the real rate of return from an investment
in the Funds. Advertisements for a Fund may also include general information
about the performance of unmanaged indexes with investment parameters similar to
the Fund's. Unmanaged indexes may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
From time to time, advertisements for the Funds may include general
information about the services and products offered by the Funds, MainStay
Institutional Funds Inc. and New York Life Insurance Company and its
subsidiaries. For example, such advertisements may include statistical
information about those entities including, but not limited to, the number of
current shareholder accounts, the amount of assets under management, sales
information, the distribution channels through which the entities' products are
available, marketing efforts and statements about this information by the
entities' officers, directors and employees.
TAX STATUS
TAXATION OF THE FUNDS
The following summarizes certain federal income tax considerations
generally affecting the Funds and their stockholders. No attempt is made to
present a detailed explanation of the tax treatment of the Funds or their
stockholders, and the discussion here is not intended as a substitute for
careful tax planning. The discussion is based upon present provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the
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regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisors with
regard to the federal tax consequences of the purchase, ownership, and
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
Each Fund intends to be treated as a regulated investment company ("RIC")
under Subchapter M of the Code. To qualify as a regulated investment company,
each Fund must, among other things: (I) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with respect to certain
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities, or currencies ("Qualifying
Income Test"); (ii) diversify its holdings so that, at the end of each quarter
of the taxable year, (a) at least 50% of the market value of the Fund's assets
is represented by cash, cash items, U.S. Government securities, the securities
of other regulated investment companies, and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (b) not more than 25% of
the value of its total assets is invested in the securities on any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies), or of two or more issuers which the Fund controls (as
that term is defined in the relevant provisions of the Code) and which are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses; and (iii) distribute at least 90% of the sum of its
investment company taxable income (which includes, among other items, dividends,
interest and net short-term capital gains in excess of any net long-term capital
losses) and its net tax-exempt interest each taxable year. The Treasury
Department is authorized to promulgate regulations under which foreign currency
gains would constitute qualifying income for purposes of the Qualifying Income
Test only if such gains are directly related to investing in securities (or
options and futures with respect to securities). To date, no such regulations
have been issued.
Certain requirements relating to the qualification of a Fund as regulated
investment company may limit the extent to which a Fund will be able to engage
in certain investment practices,
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including transactions in futures contracts and other types of derivative
securities transactions. In addition, if a Fund were unable to dispose of
portfolio securities due to settlement problems relating to foreign investments
or due to the holding of illiquid securities, the Fund's ability to qualify as a
regulated investment company might be affected.
A Fund qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. Each
Fund intends to distribute to its shareholders, at least annually, substantially
all of its investment company taxable income and any net capital gains.
Generally, regulated investment companies, like the Fund, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (I) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Fund intends to
make its distributions in accordance with the calendar year distribution
requirement. A distribution is treated as paid on December 31 of the calendar
year if it is declared by a Fund in October, November or December of that year
to shareholders of record on a date in such a month and paid by the Fund during
January of the following calendar year. Such distributions are taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
Provided that a Fund qualifies as a regulated investment company, under
the Code, it generally will not be subject to any excise or income taxes in
Massachusetts. A Fund's investments, if any, in REMIC residual interests (as
explained previously in this SAI) or in Passive Foreign Investment Companies, as
explained below, may cause the Fund to become liable for certain taxes.
Investors that are tax-exempt organizations should carefully consider whether
distributions of a Fund's earnings will be subject to tax in their hands.
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Each Fund, other than the Equity Index Fund (which offers only one class
of shares) and the Strategic Income Fund and Strategic Value Fund, has received
a ruling from the IRS to the effect that differing distributions between the
classes of its shares will not result in a Fund's dividends and other
distributions being regarded as "preferential dividends" under the Code.
Generally, a preferential dividend is a dividend which a Fund cannot treat as
having been distributed for purposes of (I) determining whether the Fund
qualifies as a regulated investment company for federal tax purposes, and (ii)
determining the Fund's tax liability.
CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS -- GENERAL
Assuming a Fund qualifies as a RIC, distributions of taxable net
investment income and net short-term capital gains in excess of net long-term
capital losses will be treated as ordinary income in the hands of shareholders.
If a Fund's investment income is derived exclusively from sources (such as
interest) other than dividends, no portion of such distributions will be
eligible for the dividends-received deduction available to corporations.
If a portion of a Fund's net investment income is derived from dividends
from domestic corporations, then a portion of such distributions may be eligible
for the corporate dividends-received deduction. The dividends-received deduction
is reduced to the extent shares of a Fund are treated as debt-financed under the
Code and is generally eliminated unless such shares are deemed to have been held
for more than 45 days. The 45-day holding period must occur during the 90-day
period beginning 45 days before the date on which the shares become ex-dividend.
In the case of dividends on certain preferred stock, the holding period
requirement is 90 days during a 180-day period. In addition, the entire dividend
(including the deducted portion) is includable in the corporate shareholder's
alternative minimum taxable income. Finally, if such dividends are large enough
to constitute "extraordinary dividends" under Section 1059 of the Code and the
applicable holding period requirements are not met, the shareholder's basis in
its shares could be reduced by all or a portion of the amount of the dividends
that qualifies for the dividends-received deduction.
Distributions of net capital gain, whether received in cash or reinvested
in Fund shares, will generally be taxable to shareholders as either "20% Rate
Gain" or "28% Rate Gain," depending upon the Fund's holding period for the
assets sold. "20% Rate Gains" arise from sales of assets held by a Fund for more
than 18 months and are subject to a maximum tax rate of 20%; "28% Rate
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Gains" arise from sales of assets held by a Fund for more than one year but no
more than 18 months and are subject to a maximum tax rate of 28%. Net capital
gains from assets held for one year or less will be taxed as ordinary income.
Distributions will be subject to these capital gains rates regardless of how
long a shareholder has held Fund shares.
Any loss realized upon the redemption of shares within six months from
the date of their purchase will be treated as a long-term capital loss to the
extent of any capital gain dividends received with respect to such shares during
that six-month period. A loss realized upon a redemption of shares of a Fund
within 30 days before or after a purchase of shares of the same Fund (whether by
reinvestment of distributions or otherwise) may be disallowed in whole or in
part.
If any net long-term capital gains in excess of net short-term capital
losses are retained by a Fund for reinvestment, requiring federal income taxes
to be paid thereon by that Fund, the Fund intends to elect to treat such capital
gains as having been distributed to shareholders. As a result, such capital
gains will be taxable to the shareholders. Shareholders will be able to claim
their proportionate share of the federal income taxes paid by the Fund on such
gains as a credit against their own federal income tax liabilities and will be
entitled to increase the adjusted tax basis of the relevant Fund shares by the
difference between their pro-rata share of such gains and their tax credit.
Except for distributions by the Money Market Fund, distributions by a
Fund result in a reduction in the net asset value of a Fund's shares. Should a
distribution reduce the net asset value below a shareholder's cost basis, such
distribution nevertheless would generally be taxable to the shareholder (except
to the extent the distribution is an exempt interest dividend as described
below) as ordinary income or capital gain as described above, even though, from
an investment standpoint, it may constitute a partial return of investment. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those investors
purchasing shares just prior to a distribution will then receive a partial
return of their investment upon such distribution, which may nevertheless be
taxable to them.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether
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received in shares or in cash. Any distributions that are not from a Fund's net
investment income or net capital gain may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. Shareholders
electing to receive distributions in the form of additional shares will have a
cost basis for federal income tax purposes in each share so received equal to
the net asset value of such share on the reinvestment date.
CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS -- THE TAX-FREE FUNDS
The Code permits the character of tax-exempt interest distributed by a
regulated investment company to "flow through" as tax-exempt interest to its
shareholders, provided that 50% or more of the value of its assets at the end of
each quarter of its taxable year is invested in state, municipal or other
obligations the interest on which is exempt under Section 103(a) of the Code.
Each of the California Tax Free Fund, New York Tax Free Fund and Tax Free Bond
Fund (collectively, the "Tax Free Funds") intend to satisfy the 50% requirement
to permit their distributions of tax-exempt interest to be treated as such for
regular Federal income tax purposes in the hands of their shareholders.
Exempt-interest dividends must be taken into account by individual shareholders
in determining whether their total incomes are large enough to result in
taxation of up to 85% of their social security benefits and certain railroad
retirement benefits. None of the income distributions of the Tax Free Funds will
be eligible for the deduction for dividends received by corporations.
Although a significant portion of the distributions by the Tax Free Funds
generally is expected to be exempt from federal taxes, each of these Funds may
under certain circumstances invest in obligations the interest from which is
fully taxable, or, although exempt from the regular federal income tax, is
subject to the alternative minimum tax. Similarly, gains from the sale or
exchange of obligations the interest on which is exempt from regular Federal
income tax will constitute taxable income to those Funds. In addition, a sale of
shares in such Fund (including a redemption of such shares and an exchange of
shares between two mutual funds) will be a taxable event, and may result in a
taxable gain or loss to a shareholder. Accordingly, it is possible that a
significant portion of the distributions of these Funds will constitute taxable
rather than tax-exempt income in the hands of a shareholder. Furthermore,
investors should be aware that tax laws may change, and issuers may fail to
follow applicable laws, causing a tax-exempt item to become taxable.
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Exempt-interest dividends from the Tax Free Funds; ordinary dividends
from the Tax Free Funds, if any; capital gains distributions from the Tax Free
Funds and any capital gains or losses realized from the sale or exchange of
shares may be subject to state and local taxes. However, the portion of a
distribution of the Funds' tax-exempt income that is attributable to state and
municipal securities issued within the shareholder's own state may not be
subject, at least in some states, to state or local taxes.
Distributions derived from interest on certain private activity bonds
which is exempt from regular federal income tax are treated as a tax preference
item and may subject individual or corporate shareholders to liability (or
increased liability) for the alternative minimum tax. In addition, because a
portion of the difference between adjusted current earnings, as defined in the
Code, and alternative minimum taxable income is an addition to the alternative
minimum tax base, all distributions derived from interest which is exempt from
regular federal income tax are included in adjusted current earnings and may
subject corporate shareholders to or increase their liability for the
alternative minimum tax.
DISCOUNT
Certain of the bonds purchased by the Funds, such as zero coupon bonds,
may be treated as bonds that were originally issued at a discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the difference between the price at which a security was
issued (or the price at which it was deemed issued for federal income tax
purposes) and its stated redemption price at maturity. Original issue discount
is treated for federal income tax purposes as income earned by a Fund over the
term of the bond, and therefore is subject to the distribution requirements of
the Code. The annual amount of income earned on such a bond by a Fund generally
is determined on the basis of a constant yield to maturity which takes into
account the semiannual compounding of accrued interest.
In addition, some of the bonds may be purchased by a Fund at a discount
which exceeds the original issue discount on such bonds, if any. This additional
discount represents market discount for federal income tax purposes. The gain
realized on the disposition of any bond having market discount generally will be
treated as taxable ordinary income to the extent it does not exceed the accrued
market discount on such bond (unless a Fund elects to include market discount in
income in tax years to which it is
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attributable). Realized accrued market discount on obligations that pay
tax-exempt interest is nonetheless taxable. Generally, market discount accrues
on a daily basis for each day the bond is held by a Fund at a constant rate over
the time remaining to the bond's maturity. In the case of any debt security
having a fixed maturity date of not more than one year from date of issue, the
gain realized on disposition will be treated as short-term capital gain.
USERS OF BOND-FINANCED FACILITIES
Section 147(a) of the Code prohibits exemption from taxation of interest
on certain governmental obligations to persons who are "substantial users" (or
persons related thereto) of facilities financed thereby. No investigation as to
the users of the facilities financed by bonds in the portfolios of the Tax Free
Funds has been made by these Funds. Persons who may be "substantial users" (or
"related persons" of substantial users) of facilities financed by private
activity bonds should consult their tax advisers before purchasing shares of a
Fund since the acquisition of shares of the Tax Free Bond Fund, California Tax
Free Fund or New York Tax Free Fund may result in adverse tax consequences to
them.
TAXATION OF OPTIONS, FUTURES AND SIMILAR INSTRUMENTS
Many of the options, futures contracts and forward contracts entered into
by a Fund will be classified as "Section 1256 contracts." Generally, gains or
losses on Section 1256 contracts are considered 60% long-term and 40% short-term
capital gains or losses ("60/40"). Also, certain Section 1256 contracts held by
a Fund are "marked-to-market" at the times required pursuant to the Code with
the result that unrealized gains or losses are treated as though they were
realized. The resulting gain or loss generally is treated as 60/40 gain or loss,
except for foreign currency gain or loss on such contracts, which generally is
ordinary in character.
Distribution of Fund gains from hedging transactions will be taxable to
shareholders. Generally, hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by a Fund may result in
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition, losses realized
by a Fund on positions that are part of a straddle may be deferred under the
straddle rules rather than being taken into account in the taxable year in which
such losses are realized.
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Furthermore, certain transactions (including options, futures contracts,
notional principal contracts, short sales and short sales against the box) with
respect to an "appreciated position" in certain financial instruments may be
deemed a constructive sale of the appreciated position, requiring the immediate
recognition of gain as if the appreciated position were sold. Because only a few
regulations implementing the straddle rules have been promulgated, and
regulations relating to constructive sales of appreciated positions have yet to
be promulgated, the tax consequences of transactions in options, futures and
forward contracts to a Fund are not entirely clear. The hedging transactions in
which a Fund engages may increase the amount of short-term capital gain realized
by a Fund which is taxed as ordinary income when distributed to shareholders.
A Fund may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a Fund that did not engage in such hedging transactions.
The diversification requirements applicable to a Fund's status as a
regulated investment company may limit the extent to which a Fund will be able
to engage in transactions in options, futures contracts or forward contracts.
Regarding the Tax Free Bond Fund, the California Tax Free Fund and New
York Tax Free Fund, gains from certain transactions, including, for example,
transactions in options, futures, and other instruments, and from obligations
the interest on which is not exempt from Federal income tax, will be taxable
income to those Funds.
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The International Bond Fund, International Equity Fund, Strategic Value
Fund and Strategic Income Fund may engage in swap transactions. The tax
treatment of swap agreements is not entirely clear in certain respects.
Accordingly, while the Funds intend to account for such transactions in a manner
they deem to be appropriate, the IRS might challenge such treatment. If such a
challenge were successful, status of a Fund as a regulated investment company
might be affected. The Funds intend to monitor developments in this area.
PASSIVE FOREIGN INVESTMENT COMPANIES
Certain of the Funds may invest in shares of foreign corporations which
may be classified under the Code as passive foreign investment companies
("PFICs"). In general, a foreign corporation is classified as a PFIC if at least
one-half of its assets constitute investment-type assets or 75% or more of its
gross income is investment-type income. If a Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to Shareholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the Fund held the PFIC shares. The Fund itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC shares are
treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
A Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. Alternatively, a Fund may elect to mark to
market its PFIC shares at the end of each taxable year, with the result that
unrealized gains are treated as though they were realized and reported as
ordinary income. Any mark-to-market losses and any loss from an actual
disposition of
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PFIC Shares would be deductible as ordinary losses to the extent of any net
mark-to-market gains included in income in prior years.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a Fund that did not invest in PFIC shares.
FOREIGN CURRENCY GAINS AND LOSSES
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time a Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward and other contracts, gain or
loss attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of disposition also
are treated as ordinary gain or loss. These gains or losses, referred to under
the Code as "Section 988" gains or losses, may increase or decrease the amount
of a Fund's net investment income to be distributed to its shareholders. If
Section 988 losses exceed other investment company taxable income (which
includes, among other items, dividends, interest and the excess, if any, of net
short-term capital gains over net long-term capital losses) during the taxable
year, a Fund would not be able to make any ordinary dividend distributions, and
distributions made before the losses were realized would be recharacterized as a
return of capital to shareholders or, in some cases, as capital gain, rather
than as an ordinary dividend.
COMMODITY INVESTMENTS
A regulated investment company is required under the Code to derive at
least 90% of its gross income from certain qualifying sources. Qualifying income
includes, inter alia, interest, dividends, and gain from the sale of stock or
securities, but it
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does not include gain from the sale of commodities such as gold and other
precious metals.
DISPOSITIONS OF FUND SHARES
Upon redemption, sale or exchange of shares of a Fund, a shareholder will
realize a taxable gain or loss, depending on whether the gross proceeds are more
or less than the shareholder's tax basis for the shares. Such gain or loss
generally will be a capital gain or loss if the shares of a Fund were capital
assets in the hands of the shareholder, and generally will be taxable to
stockholders as "20% Rate Gain" if the shares had been held for more than 18
months or as "28% Rate Gain" if the shares had been held for more than one year
but no more than 18 months. A loss realized by a shareholder on the redemption,
sale or exchange of shares of a Fund with respect to which capital gain
dividends have been paid will, to the extent of such capital gain dividends, be
treated as long-term capital loss if such shares have been held by the
shareholder for six months or less at the time of their disposition.
Furthermore, a loss realized by a shareholder on the redemption, sale or
exchange of shares of a Fund with respect to which exempt-interest dividends
have been paid will, to the extent of such exempt-interest dividends, be
disallowed if such shares have been held by the shareholder for six months or
less at the time of their disposition. A loss realized on a redemption, sale or
exchange also will be disallowed to the extent the shares disposed of are
replaced (whether through reinvestment of distributions, or otherwise) within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
Shareholders should be aware that redeeming shares of a Fund after
tax-exempt interest has been accrued by the Fund but before that income has been
declared as a dividend may be disadvantageous. This is because the gain, if any,
on the redemption will be taxable, even though such gains may be attributable in
part to the accrued tax-exempt interest which, if distributed to the shareholder
as a dividend rather than as redemption proceeds, might have qualified as an
exempt-interest dividend.
Under certain circumstances, the sales charge incurred in acquiring
shares of either Fund may not be taken into account in determining the gain or
loss on the disposition of those shares. This rule applies where shares of a
Fund are exchanged within 90 days after the date they were purchased and new
shares are acquired
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without a sales charge or at a reduced sales charge pursuant to a right acquired
upon the initial purchase of shares. In that case, the gain or loss recognized
on the exchange will be determined by excluding from the tax basis of the shares
exchanged all or a portion of the sales charge incurred in acquiring those
shares. The portion of the sales charge affected by this rule will be treated as
a sales charge paid for the new shares and will be reflected in their basis.
If reverse stock splits are done, a share may have a split holding period
reflecting the fact that part of the share represents a reinvested dividend or
distribution.
TAX REPORTING REQUIREMENTS
All distributions, whether received in shares or cash, must be reported
by each shareholder on his or her federal income tax return. Shareholders are
also required to report tax-exempt interest. Dividends declared and payable to
shareholders of record on a specified date in October, November or December, if
any, will be deemed to have been received by shareholders on December 31 if paid
during January of the following year. Redemptions of shares, including exchanges
for shares of another Fund, may result in tax consequences (gain or loss) to the
shareholder and generally are also subject to these reporting requirements. Each
shareholder should consult his or her own tax adviser to determine the tax
status of a Fund distribution in his or her own state and locality (or foreign
country).
Under the federal income tax law, a Fund will be required to report to
the IRS all distributions of income (other than exempt-interest dividends) and
capital gains as well as gross proceeds from the redemption or exchange of Fund
shares (other than shares of the Money Market Fund), except in the case of
certain exempt shareholders. Under the backup withholding provisions of Section
3406 of the Code, all such taxable distributions and proceeds from the
redemption or exchange of a Fund's shares may be subject to withholding of
federal income tax at the rate of 31% in the case of nonexempt shareholders who
fail to furnish a Fund with their taxpayer identification number and with
required certifications regarding their status under the federal income tax law
or if the IRS or a broker notifies a Fund that the number furnished by the
shareholder is incorrect. In addition, both the Fund and the shareholder are
potentially subject to a $50 penalty imposed by the IRS if a correct, certified
taxpayer identification number is not furnished and used on required information
returns.
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If the withholding provisions are applicable, any such distributions and
proceeds, whether taken in cash or reinvested in shares, will be reduced by the
amounts required to be withheld. Backup withholding is not an additional tax and
any amounts withheld are creditable against the shareholder's U.S. Federal tax
liability. Investors may wish to consult their tax advisers about the
applicability of the backup withholding provisions.
FOREIGN TAXES
Investment income and gains received by a Fund from sources outside the
United States may be subject to foreign taxes which were paid or withheld at the
source. The payment of such taxes will reduce the amount of dividends and
distributions paid to the Funds' stockholders. Since the percentage of each
Fund's total assets (with the exception of the International Bond Fund and
International Equity Fund) which will be invested in foreign stocks and
securities will not be more than 50%, any foreign tax credits or deductions
associated with such foreign taxes will not be available for use by its
shareholders. The effective rate of foreign taxes to which a Fund will be
subject depends on the specific countries in which each Fund's assets will be
invested and the extent of the assets invested in each such country and,
therefore, cannot be determined in advance.
The International Bond Fund and the International Equity Fund may qualify
for and make the election permitted under Section 853 of the Code so that
shareholders will be able to claim a credit or deduction on their federal income
tax returns for, and will be required to treat as part of the amounts
distributed to them, their pro rata portion of qualified taxes paid by the Fund
to foreign countries (which taxes relate primarily to investment income). The
U.S. shareholders of a Fund may claim a foreign tax credit or deduction by
reason of the Fund's election under Section 853 of the Code, provided that more
than 50% of the value of the total assets of the Fund at the close of the
taxable year consists of securities of foreign corporations. The foreign tax
credit and deduction available to shareholders is subject to certain limitations
imposed by the Code. Also, under Section 63 of the Code, no deduction for
foreign taxes may be claimed by shareholders who do not itemize deductions on
their federal income tax returns, although any such shareholder may claim a
credit for foreign taxes and in any event will be treated as having taxable
income in respect to the shareholder's pro rata share of foreign taxes paid by
the Fund. It should also be noted that a tax-exempt shareholder, like other
shareholders, will be required to treat as part of the amounts
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distributed its pro rata portion of the income taxes paid by the Fund to foreign
countries. However, that income will generally be exempt from taxation by virtue
of such shareholder's tax-exempt status, and such a shareholder will not be
entitled to either a tax credit or a deduction with respect to such income. The
foreign tax credit generally may offset only up to 90% of the alternative
minimum tax in any given year. Foreign taxes generally are not deductible in
computing alternative minimum taxable income.
STATE AND LOCAL TAXES - GENERAL
The state and local tax treatment of distributions received from a Fund
and any special tax considerations associated with foreign investments of a Fund
should be examined by shareholders with regard to their own tax situations.
Shareholders of the Tax Free Bond Fund, the California Tax Free Fund and
New York Tax Free Fund may be subject to state and local taxes on distributions
from the Fund, including distributions which are exempt from federal income
taxes. Some states exempt from the state personal income tax distributions from
a Fund derived from interest on obligations issued by the U.S. government or by
such state or its municipalities or political subdivisions. Each investor should
consult his or her own tax adviser to determine the tax status of distributions
from the Funds in his or her own state and locality.
Opinions relating to the validity of municipal securities and the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the issuers. The Tax Free Bond Fund, California Tax Free Fund and New
York Tax Free Fund, the Sub-Adviser and its affiliates, and the Funds' counsel
make no review of proceedings relating to the issuance of state or municipal
securities or the bases of such opinions.
Due to the lack of adequate supply of certain types of tax-exempt
obligations, and other reasons, various instruments are being marketed which are
not "pure" state and local obligations, but which are thought to generate
interest excludable from taxable income under Code section 103. While a Fund may
invest in such instruments, it does not guarantee the tax-exempt status of the
income earned thereon or from any other investment. Thus, for example, were a
Fund to invest in an instrument thought to give rise to tax-exempt interest but
such interest ultimately were determined to be taxable, the Fund might have
invested more than 20% of its assets in taxable instruments. In addition, it is
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possible in such circumstances that a Fund will not have met the 50% investment
threshold, described above, necessary for it to pay exempt-interest dividends.
EXPLANATION OF FUND DISTRIBUTIONS
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, each Fund will issue to
each shareholder a statement of the federal income tax status of all
distributions, including, in the case of the Tax Free Bond Fund, the California
Tax Free Fund and New York Tax Free Fund, a statement of the percentage of the
prior calendar year's distributions which the Fund has designated as tax-exempt,
the percentage of such tax-exempt distributions treated as a tax-preference item
for purposes of the alternative minimum tax, and in, the case of the Tax Free
Bond Fund, the source on a state-by-state basis of all distributions.
ADDITIONAL INFORMATION REGARDING THE EQUITY INDEX FUND
If Shareholders receive distributions of amounts paid pursuant to such
distributions from the Fund may not be eligible for the dividends-received
deduction available to corporations.
In addition, although not considered likely, it is possible that
shareholders could be regarded for tax purposes as receiving a constructive
distribution(s) (which could be taxable) from the Fund to the extent that the
Guarantee is deemed to have value.
It is anticipated that capital gain or loss from the disposition of
shares will be eligible for treatment as long-term or short-term capital gain or
loss depending upon the shareholder's actual holding period for the shares.
Investors should be aware that, under IRS regulations, as a result of the
Guarantee, a shareholder's holding period for Fund shares might be deemed not to
commence until the Guarantee is paid or expires. In that event, the capital gain
or loss on the disposition of Fund shares would be short-term capital gain or
loss until such time as the shares have been held continuously by the
shareholder for the requisite long-term holding period (currently more than one
year for Federal income tax purposes) after the expiration or payment of the
Guarantee. The holding period for shares received from reinvestment of dividends
and distributions will commence no earlier than the reinvestment date but could
be delayed as described previously in this paragraph as a result of the
Guarantee.
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ADDITIONAL INFORMATION REGARDING THE CALIFORNIA TAX FREE FUND AND NEW YORK TAX
FREE FUND
Under California law, a mutual fund which qualifies as a regulated
investment company must have at least 50% of its total assets in obligations
exempt from California personal income tax at the end of each quarter of its
taxable year in order to be eligible to pay dividends which will be exempt from
California personal income tax. Generally, shareholders who are California
residents will not incur California personal income tax on the amount of
exempt-interest dividends received by them from the California Tax Free Fund and
derived from California state and local issues, whether taken in cash or
reinvested in additional shares. However, other taxes, such as the franchise tax
may apply. Shareholders will normally be subject to California personal income
tax on dividends paid from interest income derived from taxable securities and
from securities issued by states other than California and its subsidiaries and
on distributions of capital gains.
Deductions for interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund may be disallowed in whole
or in part for California personal income tax purposes.
Exempt-interest dividends paid by the New York Tax Free Fund from
interest on qualifying New York bonds generally are exempt from New York State
and New York City personal income taxes, but not corporate franchise taxes.
Dividends and distributions of the Fund derived from taxable income and capital
gains are not exempt from New York State and New York City taxes. Deductions for
interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund may be disallowed in whole or in part for New York
State or New York City personal income tax purposes.
Dividends from the California Tax Free Fund or New York Tax Free Fund
(including exempt-interest dividends), capital gains distributions from a Fund,
and any capital gains or losses realized from the sale or exchange of shares may
be subject to state and local taxes (as well as Federal taxes). However, the
portion of a distribution of a Fund's tax-exempt income that is attributable to
state and municipal securities issued within the shareholder's own state
generally will not be subject to state or local taxes. Individuals are often
exempt from state and local personal income taxes on distributions of tax-exempt
interest income derived from obligations of issuers located in the state in
which they reside
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when these distributions are received directly from these issuers, but are
usually subject to such taxes on income derived from obligations of issuers
located in other jurisdictions. Shareholders are urged to consult their tax
advisers with specific reference to their own federal, state and local tax
situations.
ANNUAL STATEMENTS
Each shareholder of the California Tax Free Fund will be sent after the
close of the calendar year an annual statement as to the federal income tax and
California state personal income tax status of his or her dividends and
distributions from the Fund for the prior calendar year. Any dividends
attributable to interest on municipal obligations that are not California
municipal securities will be taxable as ordinary dividends for California state
personal income tax purposes even if such dividends are excluded from gross
income for federal income tax purposes. These statements will also designate the
amount of exempt-interest dividends that is a specific preference item for
purposes of the federal individual and corporate alternative minimum taxes. Each
shareholder also will receive, if appropriate, various written notices after the
close of the Fund's prior taxable year as to the federal income tax status of
his or her dividends and distributions which were received from the Fund during
the Fund's prior taxable year. Shareholders should consult their tax advisers as
to any other state and local taxes that may apply to these dividends and
distributions. The dollar amount of dividends excluded or exempt from federal
income taxation or California state personal income taxation, if any, will vary
for each shareholder depending upon the size and duration of each shareholder's
investment in the Fund.
Each shareholder of the New York Tax Free Fund will be sent after the
close of the calendar year an annual statement as to the federal income tax and
New York State and New York City personal income tax status of his or her
dividends and distributions from the Fund for the prior calendar year. These
statements will also designate the amount of exempt-interest dividends that is a
specified preference item for purposes of the federal individual and corporate
alternative minimum taxes. Each shareholder also will receive, if appropriate,
various written notices after the close of the Fund's prior taxable year as to
the federal income tax status of his or her dividends and distributions which
were received from the Fund during the Fund's prior taxable year. Shareholders
should consult their tax advisers as to any other state and local taxes that may
apply to these dividends and distributions. The dollar amounts of dividends
excluded or exempt
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from federal income taxation or New York State and City personal income taxation
and the dollar amount subject to federal income taxation or New York State and
City personal income taxation, if any, will vary for each shareholder depending
upon the size and duration of each shareholder's investment in the Fund.
GENERAL INFORMATION
The foregoing discussion generally relates to U.S. federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). Each shareholder who
is not a U.S. person should consult his or her tax adviser regarding the U.S.
and non-U.S. tax consequences of ownership of shares of a Fund, including the
possibility that such a shareholder may be subject to a U.S. withholding tax at
a rate of 30% (or at a lower rate under an applicable U.S. income tax treaty) on
amounts constituting ordinary income to him or her.
ORGANIZATION AND CAPITALIZATION
GENERAL
The Funds are separate series of an open-end investment company, The
MainStay Funds ("Trust"), established under the laws of The Commonwealth of
Massachusetts by a Declaration of Trust dated January 9, 1986, as amended. The
Tax Free Bond Fund was originally formed as the MacKay-Shields MainStay Tax Free
Bond Fund pursuant to a Declaration of Trust on January 9, 1986 and became a
series of the Trust pursuant to a reorganization which occurred on May 29, 1987.
The Total Return Fund commenced operations on December 29, 1987. The Equity
Index Fund commenced operations on December 20, 1990. The California Tax Free
Fund and New York Tax Free Fund commenced operations on October 1, 1991. The
International Bond Fund and International Equity Fund commenced operations on
September 13, 1994. The Strategic Income Fund and Strategic Value Fund commenced
operations on February 28 and October 22, 1997, respectively. The Blue Chip
Growth Fund, Research Value Fund, Small Cap Value Fund, Growth Opportunities
Fund, Small Cap Growth Fund, Equity Income Fund and Global High Yield Fund
commenced operations on June 1, 1998. The MAP Equity Fund commenced operations
on _______, 1999. The organizational expenses of each Fund [except the MAP
Equity Fund] will be amortized and deferred over a period not to exceed 60
months. The
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Declaration of Trust and By-laws authorize the Trustees to establish additional
series or "Funds" as well as additional classes of shares.
VOTING RIGHTS
Shares entitle their holders to one vote per share; however, separate
votes will be taken by each Fund or class on matters affecting an individual
Fund or a particular class of shares issued by a Fund. Shares have noncumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Trustees can elect all Trustees and, in such event, the
holders of the remaining shares voting for the election of Trustees will not be
able to elect any person or persons as Trustees. Shares have no preemptive or
subscription rights and are transferable.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust. Notice of such disclaimer will
normally be given in each agreement, obligation or instrument entered into or
executed by the Trust or the Trustees. The Declaration of Trust provides for
indemnification by the relevant Fund for any loss suffered by a shareholder as a
result of an obligation of the Fund. The Declaration of Trust also provides that
the Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which a Fund would be
unable to meet its obligations. The Trustees believe that, in view of the above,
the risk of personal liability of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
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OTHER INFORMATION
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New
York, 10036, has been selected as independent accountants of the Trust. The
Funds' Annual Reports, which are incorporated by reference in this SAI, have
been so incorporated in reliance on the reports of Price Waterhouse, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
passes upon certain legal matters in connection with the shares offered by the
Trust, and also acts as counsel to the Trust.
SHARE OWNERSHIP OF THE FUNDS [TO BE UPDATED]
The following table sets forth information concerning beneficial and
record ownership, as of ________, 1999, of the Funds' shares by each person who
beneficially or of record owns more than five percent of the voting securities
of any Fund:
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<TABLE>
<CAPTION>
Shares Percentage
Name and Address Beneficially Outstanding
Name of Fund of Shareholder Owned (1) Shares Owned
- ------------ --------------- --------------------------------------------------
<S> <C> <C> <C>
New York Smith Barney Inc.
Tax Free Fund 00130797803 ------ ------
Class A 388 Greenwich Street
New York NY 10013-2339
New York Helen Ostreicher
Tax Free Fund Agnes Zitter ------ ------
Class A 1 Lakeside Dr East
Lawrence NY 11559-1718
New York NYLIFE Distributors Inc.
Tax Free Fund c/o George Daoust ------ ------
Class A PO Box 421
Parsippany NJ 07054-0421
Equity Index New York Life Trust Company
Fund Client Accounts ------ ------
Class A 51 Madison Avenue, Rm 117A
New York, NY 10010-1603
Blue Chip New York Life Insurance Company
Growth Fund Attn Jean Hoysradt ------ ------
Class B 51 Madison Avenue
New York, NY 10010-1603
Equity Income New York Life Insurance Company
Fund Attn Jean Hoysradt ------ ------
Class A 51 Madison Avenue
New York NY 10010-1603
Research Value New York Life Insurance Company
Fund Attn Jean Hoysradt ------- ------
Class A 51 Madison Avenue
New York NY 10010-1603
Research Value New York Life Insurance Company
Fund Attn Jean Hoysradt ------- ------
Class B 51 Madison Avenue
New York NY 10010-1603
Equity Income New York Insurance Company
Fund Attn Jean Hoysradt ------ ------
Class B New York, NY 10010-1603
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Capital New York Life Trust Company
Appreciation Client Accounts ------ ------
Class A 51 Madison Avenue Rm 117A
New York NY 10010-1603
Value Fund New York Life Trust Company
Class A Client Accounts ------ ------
51 Madison Avenue Rm 117A
New York NY 10010-1603
Convertible New York Life Trust Company
Fund Client Accounts ------ ------
Class A 51 Madison Avenue Rm 117
New York NY 10010-1603
Government New York Life Trust Company
Fund Client Accounts ------ ------
Class A 51 Madison Avenue Rm 117A
Tax Free Schmitt Family Trust
Bond Fund Dtd 9-13-91 ------ ------
Class A James S Schmitt & Don L Waters
& Kim Schmitt Fogarty TTEES PO
Box 1566 Savannah GA 31402-1566
Tax Free Michael N. Marks
Bond Fund PO Box 529 ------ ------
Class A Pottsboro TX 75076-0529
Tax Free Jaroth II LLC
Bond Fund Michael Zumbo TTEE ------ ------
Class A Thomas Keane TTEE
14472 Wicks Blvd
San Leandro CA 94577-9712
Money Market Koch Industries Inc.
Fund Darryl J Graham TTEE ------ ------
Class A 1299 Ocean Avenue Suite 700
Santa Monica CA 90401-1036
Money Market New York Life Trust Company
Fund Client Accounts ------ ------
Class A 51 Madison Avenue Rm 117A
New York NY 10010-1603
</TABLE>
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<TABLE>
<S> <C> <C> <C>
International Merrill Lynch Pierce Fenner &
Bond Fund Smith Inc - for the Sole Benefit ------ ------
Class A of its Customers
Attn: Fund Administration 97T78
4800 Dear Lake Drive East 3rd FL
Jacksonville FL 32246-6484
International Defined Benefit Pension Trust of
Bond Fund FMCNA ------ ------
Class A c/o The Free Methodist Foundation
PO Box 580
8050 Spring Arbor Road
Strong Arbor MI 49283-0580
International NYLIFE Distributors
Bond Fund Attn George Daoust ------ ------
Class A 260 Cherry Hill Rd
Parsippany NJ 07054-1108
International New York Life Trust Company
Equity Fund Clients Accounts ------ ------
Class A New York NY 10010-1603
International NYLIFE Distributors
Equity Fund Attn George Daoust ------ ------
Class A 260 Cherry Hill Rd
Parsippany NJ 07054-1108
Total Return New York Life Trust Company
Fund Client Accounts ------ ------
Class A 51 Madison Avenue Rm 117A
New York NY 10010-1603
Strategic Income James C. Calano
Fund 200 Boulder View Lane ------ ------
Class A Boulder CO 80304-0491
Strategic Income New York Life Ins. General Account
Fund Attn Richard Schwartz ------ ------
Class A 260 Cherry Hill Rd
Parsippany NJ 07054-1187
Strategic Value New York Life Insurance Company
Fund Attn Richard Schwartz ------ ------
Class A 260 Cherry Hill Rd
Parsipany NJ 07054-1187
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Blue Chip New York Life Insurance Company
Growth Fund Attn Jean Hoysradt ------ ------
Class A 51 Madison Avenue
New York NY 10010-1603
Global High New York Life Insurance Company
Yield Fund Attn Jean Hoysradt ------ ------
Class A 51 Madison Avenue
New York NY 1010-1603
Global High Hedwig E. Martin TTEE
Yield Fund FBO The Matin Survivors Tr ------ ------
Class B u/a dtd 7/24/91
Novato CA 94947-2032
Global High New York Life Insurance Company
Yield Fund Attn Jean Hoysradt ------ ------
Class B 51 Madison Avenue
New York NY 10010-1603
Growth Opportunities New York Life Insurance Company
Fund Attn Jean Hoysradt ------ ------
Class A 51 Madison Avenue
New York NY 10010-1603
Growth Opportunities Attn Sonny Panaligan
Fund c/o CTC Illinois Tr Co ------ ------
Class B Wexford Clearing Services Corp FBO
County Employees Annuity TTEE
Benefit Fund 33
Chicago IL 60606
Growth Opportunities New York Life Trust Company
Fund Cust for the IRA of ------ ------
Class B Henry E Brantley Jr
585 Longville Church Rd
Longville LA 70652-5040
Growth Opportunities New York Life Insurance Company
Fund Attn Jean Hoysradt ------ ------
Class B 51 Madison Avenue
New York NY 10010-1603
Small Cap New York Life Insurance Company
Value Fund Attn Jean Hoysradt ------ ------
Class A 51 Madison Avenue
New York NY 10010-1603
</TABLE>
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<PAGE> 300
<TABLE>
<S> <C> <C> <C>
Small Cap New York Life Insurance Company
Value Fund Attn Jean Hoysradt ------ ------
Class B 51 Madison Avenue
New York NY 10010-1603
Small Cap New York Life Insurance Company
Growth Fund Attn Jean Hoysradt ------ ------
Class A 51 Madison Avenue
New York NY 10010-1603
Small Cap New York Life Insurance Company
Growth Fund Attn Jean Hoysradt ------ ------
Class B 51 Madison Avenue
New York NY 10010-1603
California Tax Jaroth II LLC
Free Fund Michael Zumbo TTEE ------ ------
Class A Thomas Keane TTEE
14472 Wicks Blvd
San Leandro CA 94577-6712
California Tax NYLIFE Distributors Inc.
Free Fund c/o George Daoust ------ ------
Class A PO Box 421
Parsippany NJ 07054-0421
California Tax Otto V. & Yvonne Louise-Ericksen
Free Fund Tschudi Revoc Living Tst Dtd 9-8-88 ------ ------
Class A Otto V. & Yvonne Louise-Ericksen
Tschudi TTEES
1885 St Andrews Dr
Moraga CA 94556-1057
Strategic Income NYLIFE Distributors Inc.
Fund Attn George Daoust ------ ------
Class B 300 Interpace Parkway
Parsippany NJ 07054-1100
New York Tax Felice Brand
Free Fund 156 Wright Ave ------ ------
Class B Deer Park NY 11729-2224
New York Tax Henry Sheiman Irrevocable Trust
Free Fund Dtd 03/06/97 ------ ------
Class B Robert Sheiman TTEE
David Brown TTEE
411 Theodore Fremd Ave Ste 3
Rye NY 10580-1411
</TABLE>
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<TABLE>
<S> <C> <C> <C>
California Tax William J & Elinor G. Potikian
Free Fund Family Revocable Trust ------ ------
Class B Dtd 8-17-93
Jacinda Potikian TTEE
4475 N College
Fresno CA 93704-3806
</TABLE>
(1) This information, not being within the knowledge of the Trust, has been
furnished by each of the above persons. Beneficial ownership is as
defined under Section 13(d) of the Securities Exchange Act of 1934.
Fractional Shares have been omitted.
(2) Mr. George Daoust, in connection with his position with NYLIFE
Distributors, has the power to vote all of the shares shown in the above
table owned by NYLIFE Distributors. Mr. Daoust disclaims beneficial
ownership of such shares.
NYLIFE Distributors Inc. is a corporation organized under the laws of
Delaware. NYLIFE Distributors Inc. is a wholly owned subsidiary of NYLIFE Inc.,
and an indirect wholly owned subsidiary of New York Life Insurance Company.
CODE OF ETHICS
The Trust has adopted a Code of Ethics governing personal trading
activities of all Trustees, officers of the Trust and persons who, in connection
with their regular functions, play a role in the recommendation of any purchase
or sale of a security by the Trust or obtain information pertaining to such
purchase or sale or who have the power to influence the management or policies
of the Trust or an Investment Sub-Adviser unless such power is the result of
their position with the Trust or Investment Sub-Adviser. Such persons are
generally required to preclear all security transactions with the Trust's
Compliance Officer or his designee and to report all transactions on a regular
basis. The Trust has developed procedures for administration of the Code. The
Sub-Advisers that are unaffiliated with New York Life Insurance Company have
adopted their own Codes of Ethics to govern the personal trading activities of
their personnel.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
- -------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
- -------------------------------------------------------------------------------
Corporate and Municipal Bond Ratings Aaa: Bonds which are rated Aaa are judged
to be of the best quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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<PAGE> 303
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classified from Aa through Caa. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
midrange ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Advance refunded issues that are secured by escrowed funds held in cash, held in
trust, reinvested in direct noncallable United States government obligations or
noncallable obligations unconditionally guaranteed by the U.S. government are
identified with a hatchmark (#) symbol, i.e., #Aaa.
Moody's assigns conditional ratings to bonds for which the security depends upon
the completion of some act or the fulfillment of some condition. These are bonds
secured by: (a) earnings of projects under construction; (b) earnings of
projects unseasoned in operating experience; (c) rentals that begin when
facilities are completed; or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition, e.g.,
Con.(Baa).
Municipal Short-Term Loan Ratings
MIG 1/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
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MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations which have an original maturity not exceeding
one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
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<PAGE> 305
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S
- -------------------------------------------------------------------------------
Corporate and Municipal Long-Term Debt Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong. AA: Debt rated AA differs from the highest rated issues only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: Debt rated A is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated categories.
However, the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB: Debt rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having significant speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B-227
<PAGE> 306
B: Debt rated B is more vulnerable to nonpayment than obligations rated BB, but
the obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated CCC is currently vulnerable to nonpayment and is dependent upon
favorable business, financial and economic conditions for the obligor. In the
event of adverse business, financial or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition has
been filed or a similar action has been taken, but debt service payments are
continued.
D: Debt rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating will also be used upon the filing of
a bankruptcy petition, or the taking of similar action, if debt service payments
are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Short-Term Rating Definitions
A-1: A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign(+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
B-228
<PAGE> 307
A-2: A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated 'C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
B-229
<PAGE> 308
AUDITED FINANCIAL STATEMENT FOR NYLIFE INC.
[TO BE INSERTED]
B-230
<PAGE> 309
THE MAINSTAY FUNDS
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
a. (1) Amended and Restated Declaration of Trust dated August 30,
1991 -- Previously filed as Exhibit 1(a) to Post-Effective
Amendment No. 13*
(2) Fifth Amended and Restated Establishment and Designation of
Series of Shares of Beneficial Interest, Par Value $.01 Per
Share dated October 26, 1992 -- Previously filed as Exhibit 1
(b) to Post-Effective Amendment No. 16*
(3) Establishment and Designation of Additional Series of Shares
of Beneficial Interest, Par Value $.01 Per Share -- Previously
filed as Exhibit 1(b) to Post-Effective Amendment No. 11*
(4) Form of Establishment and Designation of Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(b) to Post-Effective Amendment
No. 23*
(5) Form of Declaration of Trust as Amended and Restated December
31, 1994 -- Previously filed as Exhibit 1(e) to Post-Effective
Amendment No. 27*
(6) Form of Establishment and Designation of Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(e) to Post-Effective Amendment
No. 28*
(7) Form of Establishment and Designation of an Additional Series
of Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(g) to Post-Effective Amendment
No. 35*
(8) Establishment and Designation of an Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(h) to Post-Effective Amendment
No. 38*
(9) Establishment and Designation of Additional Series of Shares
of Beneficial Interest, Par Value $.01 Per Share --Previously
filed as Exhibit 1(i) to Post--Effective Amendment No. 47*
C-4
<PAGE> 310
b. (1) Amended and Restated By-laws dated August 30, 1991 --
Previously filed as Exhibit 2 to Post-Effective Amendment No.
13*
(2) Amended and Restated By-Laws dated December 31, 1994 --
Previously filed as Exhibit 2(b) to Post-Effective Amendment
No. 32*
c. Specimen Share Certificate -- Previously filed as Exhibit 4 to
Pre-Effective Amendment No. 2*
d. (1)(a) Revised Form of Investment Advisory Agreement -- Capital
Appreciation Fund -- Previously filed as Exhibit 5(a)(1)
to Pre-Effective Amendment No. 2*
(b) Revised Form of Investment Advisory Agreement -- Value
Fund -- Previously filed as Exhibit 5(a)(2) to
Pre-Effective Amendment No. 2*
(C) Revised Form of Investment Advisory Agreement --
Convertible Fund -- Previously filed as Exhibit 5(a)(3) to
Pre-Effective Amendment No. 2*
(d) Revised Form of Investment Advisory Agreement -- High
Yield Corporate Bond Fund -- Previously filed as Exhibit
5(a)(4) to Pre-Effective Amendment No. 2*
(e) Revised Form of Investment Advisory Agreement --
Government Fund -- Previously filed as Exhibit 5(a)(5) to
Pre-Effective Amendment No. 2*
(f) Revised Form of Investment Advisory Agreement -- Money
Market Fund -- Previously filed as Exhibit 5(a)(6) to
Pre-Effective Amendment No. 2*
(g) Form of Investment Advisory Agreement -- Tax Free Bond
Fund -- Previously filed as Exhibit 5(a)(7) to
Post-Effective Amendment No. 2*
(h) Revised Form of Investment Advisory Agreement -- Total
Return Fund -- Previously filed as Exhibit 5(a)(9) to
Post-Effective Amendment No. 4*
(i) Form of Investment Advisory Agreement -- Equity Index
Fund -- Previously filed as Exhibit 5(a) to Post-Effective
Amendment No. 7*
C-5
<PAGE> 311
(j) Form of Investment Advisory Agreement -- California
Tax Free Fund and New York Tax Free Fund --
Previously filed as Exhibit 5(a) to Post-Effective
Amendment No. 11*
(k) Form of Investment Advisory Agreement --
International Equity Fund and International Bond
Fund -- Previously filed as Exhibit 5 to
Post-Effective Amendment No. 23*
(l) Form of Investment Advisory Agreement--Strategic
Income Fund -- Previously filed as Exhibit 5(a)(12)
to Post-Effective Amendment No. 35*
(m) Form of Management Agreement -- Strategic Value Fund
-- Previously filed as Exhibit 5(a)(13) to Post
Effective Amendment No. 38*
(n) (1)Management Agreement - Strategic Value Fund**
(2)Management Agreement - All Funds except
Strategic Value Fund**
(2)(a) Form of Sub-Advisory Agreement -- Strategic Value
Fund -- Previously filed as Exhibit 5(b)(1) to
Post-Effective Amendment No. 38*
(b) Form of Composite Sub-Advisory Agreement
--Previously filed as Exhibit 5(b)(2) to
Post-Effective Amendment No. 42*
(c) Sub-Advisory Agreement - Blue Chip Growth Fund**
(d) Sub-Advisory Agreement - Growth Opportunities Fund**
(e) Sub-Advisory Agreement - Research Value Fund**
(f) Sub-Advisory Agreement - Small Cap Value Fund**
(g) Sub-Advisory Agreement - Equity Index Fund**
(h) Sub-Advisory Agreement - with MacKay-Shields
Financial Service Corporation**
(i) Sub-Advisory Agreement - MAP Equity Fund**
e. (1)(a) Form of Distribution Agreement -- Previously filed
as Exhibit 6(a) to Post-Effective Amendment No. 22*
(b) Distribution Agreement**
(2)(a) Form of Soliciting Dealer Agreement -- Previously
filed as Exhibit 6(b) to Pre-Effective Amendment
No. 1*
(b) Soliciting Dealer Agreement**
C-6
<PAGE> 312
f. Inapplicable
g. (1) Custodian Contract with State Street Bank and Trust
Company -- Previously filed as Exhibit 8(a) to
Pre-Effective Amendment No. 1*
(2) Fee schedule for Exhibit 8(a) -- Previously filed as
Exhibit 8(b) to Pre-Effective Amendment No. 2*
(3) Custodian Contract with The Bank of New York --
Previously filed as Exhibit 8(a) to Post-Effective
Amendment No. 7*
(4) Amendment to Custodian Contract with State Street Bank
and Trust Company**
h. (1)(a) Form of Transfer Agency Agreement -- Previously filed as
Exhibit 9(a)(1) to Post-Effective Amendment No. 37*
(b) Form of Subtransfer Agency Agreement -- Previously filed
as Exhibit 9(a)(2) to Post-Effective Amendment No. 37*
(c) Transfer Agency Agreement**
(d) Sub-Transfer Agency Agreement**
(2)(a) Form of Administration Agreement -- Equity Index Fund --
Previously filed as Exhibit 9(b) to Post Effective
Amendment No. 20*
(b) Form of Administration Agreement -- California Tax Free
Fund and New York Tax Free Fund -- Previously filed as
Exhibit 9(b) to Post-Effective Amendment No. 21*
(c) Form of Composite Administration Agreement -- Capital
Appreciation Fund, Value Fund, Convertible Fund, Total
Return Fund, High Yield Corporate Bond Fund, Government
Fund and Tax Free Bond Fund --Previously filed as Exhibit
9(b) to Post-Effective Amendment No. 22*
(d) Form of Administration Agreement -- International Equity
Fund and International Bond Fund -- Previously filed as
Exhibit 9(b) to Post-Effective Amendment No. 23*
(e) Form of Administration Agreement -- Strategic Income Fund
-- Previously filed as Exhibit 9(b)(5) to Post-Effective
Amendment No. 35*
(3) Form of Fund Accounting Service Agreement -- Previously
filed as Exhibit 9(11) to Post-Effective Amendment No. 6*
C-7
<PAGE> 313
(4) Form of Guaranty Agreement -- Equity Index Fund --
Previously filed as Exhibit 9(c) to Post-Effective
Amendment No. 7*
(5) Form of Services Agreement between The MainStay Funds and
NYLIFE Distributors Inc. -- Previously filed as Exhibit
9(b) to Post-Effective Amendment No. 25*
(6) Form of Service Agreement -- Previously filed as Exhibit
9(g) to Post-Effective Amendment No. 33*
(7) Form of Service Agreement with New York Life Benefit
Services, Inc. -- Previously filed as Exhibit 9(g) to
Post-Effective Amendment No. 37*
(8) Fund Accounting Agreement**
(9) Guaranty Agreement - Equity Index Fund**
i. Opinion and consent of counsel - Previously filed as
Exhibit 10 to Post-Effective Amendment No. 45 (accession
number 0000950130-98-002195)*
j. Consent of independent accountants**
k. 1998 Financial Statements**
l. Investment representation letter relating to initial
capital -- Previously filed as Exhibit 13 to
Pre-Effective Amendment No. 1*
m. (1)(a) Form of Composite Plan of Distribution pursuant to Rule
12b-1 (Class A shares) as approved October 30, 1995 --
Capital Appreciation Fund, Value Fund, Convertible Fund,
Total Return Fund, High Yield Corporate Bond Fund,
Government Fund and Tax Free Bond Fund -- Previously filed
as Exhibit 15(a)(1) to Post-Effective Amendment No. 32*
(b) Form of Composite Plan of Distribution pursuant to Rule
12b-1 (Class B Shares) as approved October 30, 1995 --
Capital Appreciation Fund, Value Fund, Convertible Fund,
Global Fund, Total Return Fund, Natural Resources/Gold
Fund, High Yield Corporate Bond Fund, Government Fund and
Tax Free Bond Fund -- Previously filed as Exhibit 15(a)(2)
to Post-Effective Amendment No. 32*
(c) Form of Plan of Distribution pursuant to Rule 12b-1
(Class A Shares) as approved October 30, 1995 --
International Equity Fund and International Bond
C-8
<PAGE> 314
Fund -- Previously filed as Exhibit 15(a)(3) to
Post-Effective Amendment No. 33*
(d) Form of Plan of Distribution pursuant to Rule 12b-1 (Class
B Shares) as approved October 30, 1995 -- International
Equity Fund and International Bond Fund -- Previously filed
as Exhibit 15(a)(4) to Post-Effective Amendment No. 33*
(e) Form of Plan of Distribution pursuant to Rule 12b-1 (Class
A Shares) as approved October 30, 1995 -- California Tax
Free Fund, New York Tax Free Fund and Equity Index Fund --
Previously filed as Exhibit 15(a)(5) to Post-Effective
Amendment No. 33*
(f) Form of Plan of Distribution pursuant to Rule 12b-1 (Class
B Shares) as approved October 30, 1995 -- California Tax
Free Fund and New York Tax Free Fund -- Previously filed as
Exhibit 15(a)(6) to Post-Effective Amendment No. 33*
(g) Form of Plan of Distribution pursuant to Rule 12b-1 (Class
A Shares) -- MainStay Strategic Income Fund -- Previously
filed as Exhibit 15(a)(7) to Post-Effective Amendment No.
34*
(h) Form of Plan of Distribution pursuant to Rule 12b-1 (Class
B Shares) -- MainStay Strategic Income Fund -- Previously
filed as Exhibit 15(a)(8) to Post-Effective Amendment No.
34*
(i) Form of Plan of Distribution pursuant to Rule 12b-1 (Class
A shares) -- MainStay Strategic Value Fund -- Previously
filed as Exhibit 15(a)(9) to Post-Effective Amendment No.
38*
(j) Form of Plan of Distribution pursuant to Rule 12b-1 (Class
B shares) -- MainStay Strategic Value Fund -- Previously
filed as Exhibit 15(a)(10) to Post-Effective Amendment No.
38*
(k) Form of Composite Plan of Distribution pursuant to Rule
12b-1 as approved October 24, 1997 - Previously filed as
Exhibit 15(a)(11) to Post-Effective Amendment No. 42*
(l) Form of Plan of Distribution pursuant to Rule 12b-1 (Class
C shares) - previously filed as Exhibit 15(a)(12) to
post-effective Amendment No. 50*
(m) Plan of Distribution pursuant to Rule 12b-1 (Class A
shares)--MAP Equity Fund**
(n) Plan of Distribution pursuant to Rule 12b-1 (Class B
shares)--MAP Equity Fund**
C-9
<PAGE> 315
(o) Plan of Distribution pursuant to Rule 12b-1 (Class C
shares)--MAP Equity Fund**
n. Not applicable
o. Form of Multiple Class Plan Pursuant to Rule 18f-3 -- Previously
filed as Exhibit 18 to Post-Effective Amendment No. 30*
* Incorporated herein by reference
** To be filed by amendment.
*** Filed herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT
The following chart indicates the persons controlled by New York
Life:
<TABLE>
<CAPTION>
Name Jurisdiction of Organization Percent of Voting Securities
- ---- ---------------------------- ----------------------------
Owned
-----
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Eagle Strategies Corporation Arizona 100%
- -----------------------------------------------------------------------------------------------------------------------
Greystone Realty Corporation Delaware
which owns 100% of the shares of
Greystone Realty Management, Inc. Delaware 100%
- -----------------------------------------------------------------------------------------------------------------------
NYLIFE Administration Corp. Texas 100%
- -----------------------------------------------------------------------------------------------------------------------
MacKay-Shields Financial Corporation Delaware 100%
- -----------------------------------------------------------------------------------------------------------------------
MSC Holding, Inc. (formerly Magnus Software Georgia 85.43%
Corporation, Inc.)
- -----------------------------------------------------------------------------------------------------------------------
Madison Square Advisors, Inc. Delaware 100%
- -----------------------------------------------------------------------------------------------------------------------
MainStay Institutional Funds Inc. Maryland ***
- -----------------------------------------------------------------------------------------------------------------------
MainStay Management, Inc. Delaware 100%
- -----------------------------------------------------------------------------------------------------------------------
MainStay Shareholder Services, Inc. Delaware 100%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
C-10
<PAGE> 316
<TABLE>
<CAPTION>
Name Jurisdiction of Organization Percent of Voting Securities
- ---- ---------------------------- ----------------------------
Owned
-----
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Monitor Capital Advisors, Inc. Delaware 100%
- -----------------------------------------------------------------------------------------------------------------------------
NYLIFE SFD Holding, Inc. Delaware 100%
which owns 83.33% of NYLIFE
Structured Asset Management Company Ltd. Texas
- -----------------------------------------------------------------------------------------------------------------------------
New York Life Capital Corporation Delaware 100%
- -----------------------------------------------------------------------------------------------------------------------------
New York Life Insurance and Annuity Corporation Delaware 100%
- -----------------------------------------------------------------------------------------------------------------------------
New York Life International Investment Inc. Delaware
which owns 100% of the shares of:
Monetary Research Ltd. Bermuda
and 100% of the shares of:
NYL Management Limited United Kingdom 100%
- -----------------------------------------------------------------------------------------------------------------------------
MainStay VP Series Fund, Inc. Maryland *
- -----------------------------------------------------------------------------------------------------------------------------
New York Life International, Inc. (formerly New York Delaware 100%
Life Worldwide Holding Inc.), which owns 100% of the
shares of:
- -----------------------------------------------------------------------------------------------------------------------------
New York Life Worldwide Capital, Inc. Delaware
New York Life Worldwide Development, Inc. Delaware
- -----------------------------------------------------------------------------------------------------------------------------
New York Life Worldwide (Bermuda) Ltd. Bermuda
New York Life International Holding Ltd. Mauritius
- -----------------------------------------------------------------------------------------------------------------------------
New York Life Insurance Worldwide Ltd. Bermuda
- -----------------------------------------------------------------------------------------------------------------------------
New York Life (U.K.) Ltd.,
which owns 100% of the shares of: England 100%
- -----------------------------------------------------------------------------------------------------------------------------
Windsor Construction Company Limited England
and 33.3% of
- -----------------------------------------------------------------------------------------------------------------------------
Japan Gamma Asset Management Limited Japan
and 31.5% of the shares of:
- -----------------------------------------------------------------------------------------------------------------------------
Life Assurance Holding Corporation Limited, Japan
which owns 100% of the shares of:
Windsor Life Assurance Company Limited
and which owns 51% of the shares of:
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-11
<PAGE> 317
<TABLE>
<CAPTION>
Name Jurisdiction of Organization Percent of Voting Securities
- ---- ---------------------------- ----------------------------
Owned
-----
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
KOHAP New York Life Insurance Ltd.
and which owns 50.2% of the shares of: South Korea
- -------------------------------------------------------------------------------------------------------------------------------
P.T. Asuransi Jiwa Sewur - New York
and which owns 49% of the shares of:
GEO New York Life, S.A. Indonesia
- -------------------------------------------------------------------------------------------------------------------------------
NYLIFE Depositary Corporation which owns 16.67% of Delaware 100%
NYLIFE Structured Asset Management Company Ltd. Texas
- -------------------------------------------------------------------------------------------------------------------------------
New York Life Benefit Services, Inc. which owns 100% Massachusetts 100%
of ADQ Insurance Agency Inc. Massachusetts
- -------------------------------------------------------------------------------------------------------------------------------
New York Life Trust Company New York 100%
- -------------------------------------------------------------------------------------------------------------------------------
NYLIFE Distributors Inc. Delaware 100%
- -------------------------------------------------------------------------------------------------------------------------------
NYLIFE HealthCare Management Inc., which owns Delaware
54.3% of total combined stock and 89.6% of the voting
rights of:
- -------------------------------------------------------------------------------------------------------------------------------
Express Scripts, Inc., which owns 100% of the shares Delaware
of:
- -------------------------------------------------------------------------------------------------------------------------------
Great Plains Reinsurance Company Canada
- -------------------------------------------------------------------------------------------------------------------------------
Practice Pattern Science, Inc.
ESI Canada Holdings, Inc., Canada
which owns 100% of the shares of:
- -------------------------------------------------------------------------------------------------------------------------------
ESI Canada, Inc. Canada
- -------------------------------------------------------------------------------------------------------------------------------
IVTx of Houston, Inc. Texas
- -------------------------------------------------------------------------------------------------------------------------------
IVTx of Dallas, Inc. Texas
- -------------------------------------------------------------------------------------------------------------------------------
PhyNet, Inc. Delaware
- -------------------------------------------------------------------------------------------------------------------------------
Express Scripts Vision Corporation Delaware
- -------------------------------------------------------------------------------------------------------------------------------
Avanti Corporate Health Systems Inc.
which owns 100% of the shares of: Delaware 100%
- -------------------------------------------------------------------------------------------------------------------------------
Avanti of the District, Inc. Maryland
- -------------------------------------------------------------------------------------------------------------------------------
Avanti of New Jersey, Inc. New Jersey
and owns 80% of the shares of:
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-12
<PAGE> 318
<TABLE>
<CAPTION>
Name Jurisdiction of Organization Percent of Voting Securities
- ---- ---------------------------- ----------------------------
Owned
-----
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Physicians Health Services Foundation, Inc. Maryland
- -----------------------------------------------------------------------------------------------------------------------------
Prime Provider Corp., which owns 100% of the shares New York 100%
of:
Prime Provider Corp. of Texas Texas
- -----------------------------------------------------------------------------------------------------------------------------
WellPath of Arizona Reinsurance Company Arizona 100%
- -----------------------------------------------------------------------------------------------------------------------------
NYLCare NC Holdings, Inc. Delaware 100%
which owns 50% of the shares of :
WellPath Community Health Plan Holdings, L.L.C. North Carolina
which owns 100% of:
WPCHP Holdings, Inc. Delaware
and 99% of:
WellPath Preferred Services, L.L.C. and North Carolina
WellPath Select Holdings, L.L.C. North Carolina
which owns 100% of:
WellPath Select, Inc. North Carolina
WellPath of Carolina, Inc. North Carolina
- -----------------------------------------------------------------------------------------------------------------------------
ETHIX Southeast, Inc. North Carolina 100%
- -----------------------------------------------------------------------------------------------------------------------------
NYLIFE Inc. New York 100%
- -----------------------------------------------------------------------------------------------------------------------------
NYLIFE Insurance Company of Arizona Arizona 100%
- -----------------------------------------------------------------------------------------------------------------------------
NYLIFE Refinery, Inc. Delaware 100%
- -----------------------------------------------------------------------------------------------------------------------------
NYLIFE Securities Inc. New York 100%
- -----------------------------------------------------------------------------------------------------------------------------
NYLINK Insurance Agency Incorporated Delaware 100%
which owns 100% of the shares of:
- -----------------------------------------------------------------------------------------------------------------------------
NYLINK Insurance Agency of Alabama, Alabama
Incorporated
- -----------------------------------------------------------------------------------------------------------------------------
NYLINK Insurance Agency of New Mexico, New Mexico
Incorporated
- -----------------------------------------------------------------------------------------------------------------------------
NYLINK Insurance Agency of Hawaii, Incorporated Hawaii
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-13
<PAGE> 319
<TABLE>
<CAPTION>
Name Jurisdiction of Organization Percent of Voting Securities
- ---- ---------------------------- ----------------------------
Owned
-----
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NYLINK Insurance Agency of Massachusetts, Massachusetts
Incorporated
- -----------------------------------------------------------------------------------------------------------------------------
and 50% of the shares of 0%
NYLIFE Insurance Agency of Ohio, Incorporated
- -----------------------------------------------------------------------------------------------------------------------------
NYLIFE International 100%
Investment Asia Ltd.
- -----------------------------------------------------------------------------------------------------------------------------
NYLTEMPS Inc. Delaware 100%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------
+ By including the indicated corporations in this list, New York Life is
not stating or admitting that said corporations are under its actual
control; rather, these corporations are listed here to ensure full
compliance with the requirements of this Form N-1A.
* New York Life serves as investment adviser to these entities, the shares
of which are held of record by separate accounts of New York Life (for
the New York Life Fund, Inc.) and NYLIAC (for the MainStay VP Series
Fund, Inc.). New York Life disclaims any beneficial ownership and control
of these entities.
** New York Life Foundation does not issue voting securities.
*** New York Life Insurance Company, MacKay-Shields Financial Corporation and
Monitor Capital Advisors, Inc. serve as sub-advisers to this entity.
ITEM 25. INDEMNIFICATION
New York Life Insurance Company maintains Directors & Officers Liability
insurance coverage totaling $100 million. The coverage limit applies each year
and has been extended to cover Directors, Trustees and Officers of the Trust,
and subsidiaries and certain affiliates of New York Life. Subject to the
policies' terms, conditions, deductible and retentions, Directors, Officers and
Trustees are covered for claims, including related expenses, made against them
while acting in their capacities as such. The primary policy in the amount of
$25 million is issued by National Union Fire Insurance Company of Pittsburgh,
PA, and the excess policies in the amount at $75 million are issued by various
insurance companies. The issuing insurance companies may be changed from time to
time and
C-14
<PAGE> 320
there is no assurance that any or all of the current coverage will be
maintained by New York Life.
Article IV of Registrant's Declaration of Trust states as follows:
Section 4.3. Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in paragraph b)
below:
(i) every person who is, or has been, a Trustee or officer of the
Trust shall be indemnified by the Trust, or by one or more Series thereof
if the claim arises from his or her conduct with respect to only such
Series to the fullest extent permitted by law against all liability and
against all expenses reasonably incurred or paid by him in connection
with any claim, action, suit or proceeding in which he becomes involved
as a party or otherwise by virtue of his being or having been a Trustee
or officer and against amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal, or
other, including appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines, penalties and
other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust or a Series thereof or the
Shareholders by reason of a final adjudication by a court or other body
before which a proceeding was brought that he engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust or a Series
thereof;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(i) or (b)(ii)
resulting in a payment by a Trustee or officer, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
(A) by the court or other body approving the settlement or other
disposition; or
C-15
<PAGE> 321
(B) based upon a review of readily available facts (as
opposed to a full trial-type inquiry) by (x) vote of a majority of
the Disinterested Trustees acting on the matter (provided that a
majority of the Disinterested Trustees then in office act on the
matter) or (y) written opinion of independent legal counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not
affect any rights to which any Trustee or officer may now or hereafter be
entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors, administrators
and assigns of such a person. Nothing contained herein shall affect any rights
to indemnification to which personnel of the Trust other than Trustees and
officers may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any
claim, action, suit, or proceedings of the character described in paragraph (a)
of this Section 4.3 shall be advanced by the Trust or a Series thereof to final
disposition thereof upon receipt of an undertaking by or on behalf of the
recipient, to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 4.3, provided that either:
(i) such undertaking is secured by surety bond or some other
appropriate security provided by the recipient, or the Trust or a
Series thereof shall be insured against losses arising out of any
such advances; or
(ii) a majority of the Non-interested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees acts
on the matter) or an independent legal counsel in a written opinion
shall determine, based upon a review of readily available facts (as
opposed to a full trial-type inquiry), that there is reason to
believe that the recipient ultimately will be found entitled to
indemnification.
As used in this Section 4.3, a "Non-interested Trustee" is one who
is not (i) an "Interested Person" of the Trust (including anyone who has been
exempted from being an "Interested Person" by any rule, regulation or order of
the Commission), or (ii) involved in the claim, action, suit or proceeding.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
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jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 26. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER
The business of MainStay Management, Inc., New York Life Insurance
Company, GAMCO Investors, Inc., John A. Levin & Co., Inc., Dalton, Greiner,
Hartman, Maher & Co., MacKay-Shields Financial Corporation and Monitor Capital
Advisors, Inc. is summarized under "Know with Whom You're Investing" in the
Prospectus constituting Part A of this Registration Statement, which summary is
incorporated herein by reference.
The business or other connections of each director and officer of MainStay
Management, Inc. is currently listed in the investment adviser registration on
Form ADV for MainStay Management, Inc. (File No. 801-54912) and is hereby
incorporated herein by reference.
The business or other connections of each director and officer of
MacKay-Shields Financial Corporation is currently listed in the investment
adviser registration on Form ADV for MacKay-Shields Financial Corporation (File
No. 801-5594) and is hereby incorporated herein by reference.
The business or other connections of each director and officer of Monitor
Capital Advisors, Inc. is currently listed in the investment adviser
registration on Form ADV for Monitor Capital Advisors, Inc. (File No. 801-34412)
and is hereby incorporated herein by reference.
The business or other connections of each director and officer of New York
Life Insurance Company is currently listed in the investment adviser
registration on Form ADV for New York Life Insurance Company (File No.
801-19525) and is hereby incorporated herein by reference.
The business or other connections of each director and officer of GAMCO
Investors, Inc. is currently listed in the investment adviser registration on
Form ADV for GAMCO Investors, Inc. (File No. 801-14132) and is hereby
incorporated herein by reference.
The business or other connections of each director and officer of John A.
Levin & Co., Inc. is currently listed in the investment adviser registration on
Form ADV for John A Levin & Co., Inc. (File No. 801-52602) and is hereby
incorporated herein by reference.
The business or other connections of each director and officer of Dalton,
Greiner, Hartman, Maher & Co. is currently listed in the investment adviser
registration on Form ADV for Dalton, Greiner, Hartman, Maher & Co. (File No.
801-36175) and is hereby incorporated here in by reference.
The business and other connections of each director and officer of
Markston Investment Management is currently listed in the investment adviser
registration on Form ADV for Markston Investment Management (File No. 801-____)
and is hereby incorporated by reference.
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ITEM 27. PRINCIPAL UNDERWRITERS
(a) None.
(b)
<TABLE>
<CAPTION>
(3)
(1) (2) Positions and
Name and Principal Position and Office with Offices with
Business Address NYLIFE Distributors Inc. Registrant
- ------------------ ------------------------ -------------
<S> <C> <C>
Davidson, Sheila(2) Chief Compliance Officer None
Boyce, Jefferson C.(2) Director Senior Vice President
Brady, Robert E.(1) Director and Vice President None
Boccio, Frank M.(2) Director None
Rock, Robert D.(2) Director None
Gallo, Michael G.(2) Director None
Hildebrand, Phillip J.(2) Director None
Roussin, Stephen C.(3) Director and Senior Vice President President and Chief
Gordon, Mark (3) President None
Polis, Anthony W.(3) Vice President and Chief Financial Officer Chief Financial Officer
Calhoun, Jay S.(2) Vice President and Treasurer None
Warga, Thomas J.(2) Senior Vice President and General Auditor None
Livornese, Linda M.(2) Vice President None
Murray, Thomas J.(2) Corporate Vice President None
Zuccaro, Richard W.(2) Tax Vice President Tax Vice President
Krystel, David J.(2) Vice President None
O'Byrne, John H.(2) Vice President None
Adasse, Louis H.(2) Corporate Vice President None
Daoust, George R.(3) Assistant Vice President None
Arizmendi, Arphiela(3) Assistant Vice President Assistant Treasurer
Cirillo, Antoinette B.(3) Assistant Vice President Assistant Treasurer
Lorito, Geraldine(3) Assistant Vice President Assistant Treasurer
Gomez, Mark A.(2) Secretary None
Jamison, Ronald M.(2) Assistant Secretary None
Whittaker, Lori S.(2) Assistant Secretary None
</TABLE>
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<PAGE> 324
(1) 260 Cherry Hill Road, Parsippany, NJ 07054
(2) 51 Madison Avenue, New York, NY 10010
(3) Morris Corporate Center I, Building A, 300 Interpace Parkway, Parsippany,
NJ 07054
(c) Inapplicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
Certain accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained at the offices of the Registrant, the Manager and
NYLIFE Distributors Inc., Morris Corporate Center I, Building A, 300 Interpace
Parkway, Parsippany, NJ 07054, at MacKay-Shields Financial Corporation, 9 West
57th Street, New York, NY 10019; Monitor Capital Advisors, Inc., 504 Carnegie
Center, Princeton, New Jersey 08540; New York Life Insurance Company, 51 Madison
Avenue, New York, NY 10010; GAMCO Investors, Inc., One Corporate Center, Rye, NY
10580; John A. Levin & Co., Inc., One Rockefeller Plaza, 25th Floor, New York,
NY 10020; Dalton, Greiner, Hartman, Maher & Co., 1100 Fifth Ave. South, Suite
301, Naples, FL 34102; and Markston Investment Management, 1 North Lexington
Avenue, White Plains, NY 10601. Records relating to the Registrant's transfer
agent are maintained by MainStay Shareholder Services Inc., 200 Cherry Hill
Road, Parsippany, NJ 07054. Records relating to the duties of the Registrant's
custodian for the Capital Appreciation Fund, Convertible Fund, High Yield
Corporate Bond Fund, Government Fund, Money Market Fund, Tax Free Fund, Total
Return Fund and Value Fund are maintained by State Street Bank and Trust
Company, 1776 Heritage Drive, Quincy, MA 02171; and records relating to
Registrant's custodian for the California Tax Free Fund, New York Tax Free Fund,
International Equity Fund, International Bond Fund, Equity Index Fund, Strategic
Income Fund and Strategic Value Fund are maintained by The Bank of New York, 110
Washington Street, New York, NY 10286.
ITEM 29. MANAGEMENT SERVICES.
Inapplicable.
ITEM 30. UNDERTAKINGS.
The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
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<PAGE> 325
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Parsippany
and the State of New Jersey, on the 26th day of February, 1999.
THE MAINSTAY FUNDS
By: /s/ Stephen C. Roussin
-----------------------------
STEPHEN C. ROUSSIN, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities indicated on February 26, 1999.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
* Chairman and Trustee
- -------------------------
RICHARD M. KERNAN, JR.
/s/ Stephen C. Roussin President, Chief Executive
- ------------------------- Officer and Trustee
STEPHEN C. ROUSSIN
/s/ Anthony W. Polis Chief Financial Officer
- ------------------------- (Principal Financial and
ANTHONY W. POLIS Accounting Officer)
* Trustee
- -------------------------
EDWARD J. HOGAN
* Trustee
- -------------------------
HARRY G. HOHN
</TABLE>
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<PAGE> 326
<TABLE>
<S> <C>
* Trustee
- -----------------------
DONALD K. ROSS
* Trustee
- -----------------------
RICHARD M. KERNAN, JR.
* Trustee
- -----------------------
NANCY M. KISSINGER
* Trustee
- -----------------------
TERRY L. LIERMAN
** Trustee
- -----------------------
JOHN B. McGUCKIAN
* Trustee
- -----------------------
DONALD E. NICKELSON
* Trustee
- -----------------------
RICHARD S. TRUTANIC
* Trustee
- -----------------------
WALTER W. UBL
/s/ Jeffrey L. Steele
- -----------------------
JEFFREY L. STEELE
</TABLE>
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<PAGE> 327
* Executed by Jeffrey L. Steele pursuant to a power of attorney filed with
Post-Effective Amendment No. 44 on March 17, 1998.
** Executed by Jeffrey L. Steele pursuant to a power of attorney filed with
Post-Effective Amendment No. 40 on August 28, 1997
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